Grant Thornton

July 2020

Sales and transfers of nonfinancial assets

Applying ASC 610-20

This publication was created for general information purposes and does not constitute professional advice

on facts and circumstances specific to any person or entity. You should not act upon the information

contained in this publication without obtaining specific professional advice. No representation or warranty

(express or implied) is given as to the accuracy or completeness of the information contained in this

publication. Grant Thornton LLP (Grant Thornton) shall not be responsible for any loss sustained by any

person or entity that relies on the information contained in this publication. This publication is not a

substitute for human judgment and analysis, and it should not be relied upon to provide specific answers.

The conclusions reached on the examples included in this publication are based on the specific facts and

circumstances outlined. Entities with slightly different facts and circumstances may reach different

conclusions, based on considering all of the available information.

The content in this publication is based on information available as of June 30, 2020. We may update this

publication for evolving views as we continue to monitor the implementation process. For the latest

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Portions of FASB Accounting Standards Codification® material included in this work are copyrighted by

the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and are reproduced with

permission.

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Contents

Introduction ............................................................................................................................... 4

1. Scope of ASC 610-20 ........................................................................................................... 6 1.1 Nonfinancial and in substance nonfinancial assets ..........................................................9 1.1.1 In substance nonfinancial assets .........................................................................10 1.1.2 Transfers of ownership interests in consolidated subsidiaries...................................11

1.2 Applying ASC 610-20 to a contract transferring multiple assets ....................................... 13 1.2.1 Contracts fully within scope of ASC 610-20 ...........................................................13 1.2.2 Contracts partially within scope of ASC 610-20......................................................14

2. Derecognizing the asset .......................................................................................................19

2.1 Accounting when an entity retains control of assets in a separate legal entity .................... 19 2.2 Accounting when an entity does not retain control of assets in a separate legal entity......... 20 2.2.1 Determining whether a contract exists ..................................................................21 2.2.2 Identifying distinct nonfinancial assets and in substance nonf inancial assets ..............25

2.2.3 Assessing when control transfers ........................................................................28 2.2.4 Repurchase agreements ....................................................................................32 2.3 Partial sales ............................................................................................................ 36

3. Calculating the gain or loss ...................................................................................................38

3.1 Transaction price ..................................................................................................... 38 3.1.1 Variable consideration .......................................................................................41 3.1.2 Significant financing components ........................................................................42 3.1.3 Noncash consideration ......................................................................................45

3.1.4 Consideration payable to a counterparty...............................................................45 3.2 Counterparty assumes or relieves a liability.................................................................. 46 3.3 Sales of nonf inancial assets between an investor and equity method investee .................. 48

4. Allocating the gain or loss .....................................................................................................50

4.1 Determining stand-alone selling price.......................................................................... 51 5. Presentation and disclosure ..................................................................................................53 Appendix: FASB guidance abbreviations ......................................................................................57

Introduction

Sales of nonfinancial assets include the sale of tangible assets, such as finished goods, land, buildings,

equipment, and furniture and fixtures, as well as the sale of intangible assets, such as intellectual

property. The guidance in ASC 606 applies to sales made to customers of nonfinancial assets that are an

output of the entity’s ordinary activities. However, when nonfinancial assets sold by an entity are not an

output of its ordinary activities, the sale may be subject to the guidance in ASC 610-20, which was

created when the FASB issued ASU 2014-09 (and further modified by ASU 2017-05). What constitutes

an output of an entity’s ordinary activities is a matter of judgment.

Prior to the issuance of ASU 2014-09, sales of nonfinancial assets were accounted for under various

areas of guidance in U.S. GAAP. For instance, sales of real estate were addressed in ASC 360-20, sales

of intangible assets were addressed by the limited guidance in ASC 350, while sales of property, plant,

and equipment were addressed in ASC 360. These different areas of guidance had different criteria for

derecognizing transferred assets and for recognizing gains on sales of nonfinancial assets, as well as

dif ferent disclosure requirements. ASC 610-20 consolidates much of this disparate guidance into a single

subtopic in the Codification and aligns the financial statement impact of these economically similar

transactions.

The guidance in ASC 610-20 is based on the concepts within ASC 606, requiring entities to apply the

guidance in ASC 606 on contract existence, control, and measurement. The FASB noted that there is

little economic difference between the sale of an asset that is, and one that is not, an output of the entity’s

ordinary activities, and decided to align the accounting for the sale of assets that are not part of an entity’s

ordinary activities with the guidance for sales of assets that are an output an entity’s ordinary activities in

ASC 606. As a result, the most significant way in which sales of nonfinancial and in substance

nonf inancial assets within the scope of ASC 610-20 are distinguished from sales within the scope of

ASC 606 is how they are presented in the income statement—transactions within the scope of ASC 610-

20 are not presented as revenue but as gains or losses.

This publication explains which transactions are within the scope of ASC 610-20 and how those

transactions are accounted for under that guidance.

The following flowchart provides a summary of the guidance for derecognition of assets in U.S. GAAP.

5

Derecognition of assets under U.S. GAAP

Does the transaction involve the transfer

of nonfinancial assets or in-substance

nonfinancial assets in the scope of

ASC 610-20? (See Figure 1.1)

If the transaction transfers ownership

interests in a consolidated subsidiary, does the

transferor retain a controlling financial interest

(as determined in ASC Topic 810) in

the subsidiary?

Does a contract exist (as determined in

ASC 606-10-25-1 through 25-8)?

Identify each distinct nonfinancial and

in-substance nonfinancial asset (as determined

in ASC 606-10-25-19 through 25-22)

Has control of each distinct nonfinancial and

in-substance nonfinancial asset been transferred

(as determined in ASC 606-10-25-30)?

If multiple nonfinancial and in-substance

nonfinancial assets are promised in a single

contract, allocate consideration to the distinct

assets by applying ASC 606-10-32-2

through 32-27

Apply other GAAP

(See Figure 1.1)

Apply the guidance regarding changes

in a parent s ownership interest in a

subsidiary in ASC 810-10-45-21A

through 45-24

For intangible assets, apply

ASC 350-10-40-4

For tangible assets, apply

ASC 360-10-40-3C

Measure the gain or loss on transfer

of the nonfinancial or in-substance

nonfinancial asset as the difference

between its carrying amount and the

consideration allocated to that asset

Yes

No

Yes

Yes

No

No

No

Yes

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1. Scope of ASC 610-20

The FASB Codification contains guidance spread out among various Topics that could apply to the

derecognition of an asset, depending on both the type of asset being derecognized and the nature of the

relationship between the counterparties involved in the transaction. For example, sales of assets that are

an output of an entity’s ordinary activities to customers are addressed by the revenue recognition

guidance in ASC 606, transfers of assets leased back to the seller are addressed by the sale-and-

leaseback guidance in ASC 842-40, and transfers of subsidiaries that constitute a business or nonprofit

activity are addressed by the consolidation guidance in ASC 810-10-40. The guidance in ASC 610-20,

however, is a residual standard—that is, it applies when the derecognition of a nonfinancial asset (or an

in substance nonfinancial asset) is not addressed by other guidance in U.S. GAAP.

The following flowchart walks through the various other Codification Topics that should be considered

before applying ASC 610-20.

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Figure 1.1: Scoping decision tree (ASC 610-20-15-10)

Is the counterparty a customer?

(ASC 610-20-15-4(a))

Is the transaction the transfer of a

business or nonprofit activity?

(ASC 610-20-15-4(b))

Is the transaction entirely accounted for

in accordance with Topic 860?

(ASC 610-20-15-4(e))

Does another scope exception apply?

(ASC 610-20-15-4)

Are the assets in the contract all nonfinancial

assets or all in-substance nonfinancial assets?

(ASC 610-20-15-5)

Does the contract include the transfer of an

ownership interest in one or more

consolidated subsidiaries?

(ASC 610-20-15-6)

Apply ASC 610-20 to each distinct nonfinancial

asset promised in the contract. Apply other ASC

Topics or Subtopics to the

remaining parts of the contract, if any.

Apply ASC 606

Apply ASC 810-10

Apply ASC 860

Apply other ASC Topics or Subtopics

Apply ASC 610-20 to each distinct asset

promised in the contract. Apply other ASC

Topics or Subtopics to the remaining

parts of the contract, if any.

If the assets in an individual consolidated

subsidiary are all nonfinancial assets or

all nonfinancial assets and in-substance

nonfinancial assets, then apply ASC 610-20 to

each distinct asset within that subsidiary.

Otherwise, apply ASC 810-10-40-3A(c)

or 810-10-45-21A(b)(2) to the subsidiary.

Apply other ASC Topics or Subtopics to the

remaining parts of the contract, if any.

No

No

No

No

No

No

Yes

Yes

Yes

Yes

Yes

Yes

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ASC 610-20-15-2

Except as described in paragraph 610-20-15-4, the guidance in this Subtopic applies to gains or

losses recognized upon the derecognition of nonfinancial assets and in substance nonfinancial assets.

Nonf inancial assets within the scope of this Subtopic include intangible assets, land, buildings, or

materials and supplies and may have a zero carrying value. In substance nonfinancial assets are

described in paragraphs 610-20-15-5 through 15-8.

ASC 610-20-15-3

The guidance in this Subtopic applies to a transfer of an ownership interest (or a variable interest) in

a consolidated subsidiary (that is not a business or nonprofit activity) only if all of the assets in the

subsidiary are nonfinancial assets and/or in substance nonfinancial assets.

ASC 610-20-15-4

The guidance in this Subtopic does not apply to the following:

a. A transfer of a nonfinancial asset or an in substance nonfinancial asset in a contract with a

customer, see Topic 606 on revenue from contracts with customers

b. A transfer of a subsidiary or group of assets that constitutes a business or nonprofit activity, see

Section 810-10-40 on consolidation

c. Sale and leaseback transactions within the scope of Subtopic 842-40 on leases

d. A conveyance of oil and gas mineral rights within the scope of Subtopic 932-360 on extractive

activities—oil and gas

e. A transaction that is entirely accounted for in accordance with Topic 860 on transfers and servicing

(for example, a transfer of investments accounted for under Topic 320 on investments—debt

securities, Topic 321 on investments—equity securities, Topic 323 on investments—equity method

and joint ventures, Topic 325 on investments—other, Topic 815 on derivatives and hedging, and

Topic 825 on financial instruments)

f. A transfer of nonfinancial assets that is part of the consideration in a business combination within

the scope of Topic 805 on business combinations, see paragraph 805-30-30-8

g. A nonmonetary transaction within the scope of Topic 845 on nonmonetary transactions

h. A lease contract within the scope of Topic 842 on leases

i. An exchange of takeoff and landing slots within the scope of Subtopic 908-350 on airlines—

intangibles

j. A contribution of cash and other assets, including a promise to give, within the scope of Subtopic

720-25 on other expenses—contributions made or within the scope of Subtopic 958-605 on not-for-

prof it entities—revenue recognition

k. A transfer of an investment in a venture that is accounted for by proportionately consolidating the

assets, liabilities, revenues, and expenses of the venture as described in paragraph 810-10-45-14

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l. A transfer of nonfinancial assets or in substance nonfinancial assets solely between entities or

persons under common control, such as between a parent and its subsidiaries or between two

subsidiaries of the same parent.

Grant Thornton insights: Fewer nonmonetary transactions within the scope of ASC 845

With the creation of ASC 610-20, we believe that many transactions that were formerly accounted

for under the guidance in ASC 845 will now fall under the guidance in ASC 610-20 if they do not

involve a customer. However, because inventory is an output of an entity’s ordinary activities, we

believe that the exchange of inventory for noncash consideration with a counterparty that is not a

customer will continue to be accounted for under ASC 845.

As illustrated in Figure 1.1 above, determining whether a transaction should be accounted for under

ASC 610-20 requires an entity to make a variety of determinations about both the assets being

transferred (that is, are they nonfinancial or in substance nonfinancial assets) and the nature of the

relationship between the entity and the counterparty (that is, is the counterparty a customer).

Customer

A party that has contracted with an entity to obtain goods or services that are an output of the entity’s

ordinary activities in exchange for consideration.

Whether an asset is the output of the entity’s ordinary activities is a matter of judgment based on an

entity’s individual facts and circumstances.

1.1 Nonfinancial and in substance nonfinancial assets

ASC 610-20 addresses the recognition of gains or losses when nonfinancial assets and in substance

nonf inancial assets are derecognized.

The term “nonf inancial asset” is not defined in U.S. GAAP but is a descriptive term that includes all assets

that do not meet the definition of a financial asset. Nonfinancial assets include intangible assets, land,

buildings, materials, and supplies, which may have zero carrying value. That is, a nonfinancial asset does

not have to have a carrying amount on the balance sheet to be in the scope of this guidance.

Financial Asset

Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to

do either of the following:

a. Receive cash or another financial instrument from a second entity

b. Exchange other f inancial instruments on potentially favorable terms with the second entity.

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1.1.1 In substance nonfinancial assets

If the substance of a transaction comprises a transfer of nonfinancial assets, then all of the assets in the

transaction should be accounted for using the guidance in ASC 610-20, the FASB concluded in

paragraphs 497 and 498 of the Basis for Conclusions to ASU 2014-09. According to ASC 610-20,

f inancial assets are considered to be “in substance nonfinancial assets” when substantially all of the fair

value of the assets that are promised to a counterparty in a contract is concentrated in nonfinancial

assets.

ASC 610-20-15-5

An in substance nonfinancial asset is a financial asset (for example, a receivable) promised to

a counterparty in a contract if substantially all of the fair value of the assets (recognized and

unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial

assets. If substantially all of the fair value of the assets that are promised to a counterparty in a

contract is concentrated in nonfinancial assets, then all of the financial assets promised to the

counterparty in the contract are in substance nonfinancial assets. For purposes of this evaluation,

when a contract includes the transfer of ownership interests in one or more consolidated subsidiaries

that is not a business, an entity shall evaluate the underlying assets in those subsidiaries.

Grant Thornton insights: Determining what constitutes ‘substantially all’

The guidance in ASC 610-20 does not define what constitutes “substantially all” of the fair value of the

assets in a contract. With no bright lines to use in this assessment, entities will need to exercise

judgment when determining whether substantially all of the fair value of the assets are concentrated in

nonf inancial assets. In paragraph 19 of the Basis for Conclusions (BC) to ASU 2017-05, Other Income

– Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the

Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, the

FASB noted that “substantially all” represents a higher threshold than “predominantly,” as the Board

believes the use of the higher threshold will more likely result in an appropriate assessment of the

substance of the transaction.

The FASB also notes in BC19 that the term “substantially all” is used throughout the Codification

and therefore believes that it does not need to be defined. For example, “substantially all” is used

in both the leasing guidance in ASC 842 and in the revenue guidance ASC 606 to assess whether

an entity has obtained the right to enjoy substantially all of the economic benefits of an asset being

transferred. While neither Topic uses a set percentage to define “substantially all,” the FASB included

implementation guidance in ASC 842 that allows entities to use a 90 percent threshold. Specifically,

Paragraph BC73 of ASU 2016-02 states:

Nevertheless, the Board understands that entities need to ensure the leases guidance is

operational in a scalable manner, which often requires the establishment of internal accounting

policies and controls. As a result, the Board included implementation guidance in Topic 842

that states that one reasonable application of the lease classification guidance in that Topic is

to conclude, consistent with previous GAAP, that … 90 percent or greater is “substantially all”

the fair value of the underlying asset. …

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Therefore, we believe that using 90 percent as a benchmark when evaluating whether substantially all

of the fair value of the assets promised is concentrated in nonfinancial asset will generally be

appropriate. Still, entities should consider both qualitative and quantitative facts and circumstances to

assess the substance of the transaction.

When evaluating whether substantially all of the fair value of the assets transferred is concentrated in

nonf inancial assets, any cash and cash equivalents transferred, as well as any liabilities assumed or

relieved, should be disregarded. The reason for this exclusion is that the FASB wanted to prevent entities

f rom achieving a particular accounting outcome by contributing cash to a counterparty (or assuming a

counterparty’s liabilities) and increasing the transaction price by an equivalent amount.

ASC 610-20-15-7

When determining whether substantially all of the fair value of the assets promised to a counterparty

in a contract (or an individual consolidated subsidiary within a contract) is concentrated in nonfinancial

assets, cash or cash equivalents promised to the counterparty shall be excluded. Also, any liabilities

assumed or relieved by the counterparty shall not affect the determination of whether substantially all

of the fair value of the assets transferred is concentrated in nonfinancial assets.

1.1.2 Transfers of ownership interests in consolidated subsidiaries

When the substance of a transaction is to transfer nonfinancial assets, the accounting should be the

same regardless of whether the assets, or an ownership interest in a legal entity that owns those assets,

is transferred. Accordingly, when transferring ownership interests in consolidated subsidiaries that do not

qualify as a business (as defined in ASC 805), entities should evaluate the underlying assets of the

subsidiary and determine whether substantially all of the fair value of the subsidiary’s assets is

concentrated in nonfinancial assets. If substantially all of the fair value of the subsidiary’s assets is

concentrated in nonfinancial assets, transfers of ownership interests in that subsidiary are within the

scope of the guidance in ASC 610-20. Case C of Example 1 in ASC 610-20-55-9 through 55-10 illustrates

this analysis (see Section 1.1.4).

ASC 610-20-15-6

When a contract includes the transfer of ownership interests in one or more consolidated subsidiaries

that is not a business, and substantially all of the fair value of the assets promised to a counterparty in

the contract is not concentrated in nonfinancial assets, an entity shall evaluate whether substantially

all of the fair value of the assets promised to the counterparty in an individual subsidiary within the

contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets in an

individual subsidiary is concentrated in nonfinancial assets, then the financial assets in that subsidiary

are in substance nonfinancial assets.

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However, an entity transferring ownership interests in nonconsolidated entities (for example, equity

method investments or equity investments accounted for under ASC 321) would not look through to the

underlying assets of the nonconsolidated entity to determine if the ownership interests are in substance

nonf inancial assets. Transfers of ownership interests in nonconsolidated entities would only be evaluated

as in substance nonfinancial assets if they are included in a contract in which substantially all of the

assets promised to the counterparty are nonfinancial assets.

Transfer of financial assets – Determining whether ASC 610-20 applies

Scenario 1 – Entity A consolidates Entity B prior to transaction

Entity B is a 100 percent-owned subsidiary of Entity A. Substantially all of fair value of Entity B’s assets

is concentrated in nonfinancial assets. Entity A sells 95 percent of its ownership interests in Entity B to

Entity C, but retains a 5 percent interest in Entity B.

In this scenario, Entity A determines that it will no longer have a controlling financial interest in Entity B

af ter the transaction. Entity A also determines that Entity B is not a business (and therefore is not within

the scope of ASC 810), and that the sale of Entity B to Entity C is not the output of its ordinary activities

to a customer (and therefore is not within the scope of ASC 606). Entity A looks through to the

underlying assets of Entity B and determines that substantially all of Entity B’s assets are concentrated

in nonf inancial assets. Entity A therefore concludes that its transfer of 95 percent of its ownership

interest in Entity B represents the sale of an in substance nonfinancial asset within the scope of

ASC 610-20.

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Scenario 2 – Entity A does not consolidate Entity B prior to transaction

Entity A owns a 20 percent equity interest in Entity B and accounts for its investment in Entity B using

the equity method of accounting in ASC 323. Substantially all of fair value of Entity B’s assets is

concentrated in nonfinancial assets. Entity A sells 15 percent of its 20 percent ownership interest in

Entity B to Entity C, retaining a 5 percent interest in Entity B.

In this scenario, Entity A holds a f inancial asset in the form of an equity method investment in Entity B

and therefore does not look through to the underlying assets of Entity B. Since the only asset

transferred to Entity C in the contract is the ownership interests in Entity B, Entity A concludes that the

ownership interests in Entity B are not in substance nonfinancial assets. As a result, Entity A applies

ASC 860 to its transfer of the ownership interests in Entity B to Entity C.

1.2 Applying ASC 610-20 to a contract transferring multiple assets

A contract that includes the transfer of multiple assets, including nonfinancial and in substance

nonf inancial assets, may be fully or partially within the scope of ASC 610-20.

1.2.1 Contracts fully within scope of ASC 610-20

If a contract transfers only nonfinancial and in substance nonfinancial assets and no other guidance

applies, then the contract is accounted for fully within ASC 610-20.

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Transfer of financial and nonfinancial assets: Contract fully within scope of

ASC 610-20

Entity A enters into a contract to sell a shipping vessel (a nonfinancial asset) and receivables from

customers who had previously chartered the vessel to a counterparty who is not a customer of Entity A.

Entity A determines that substantially all of the fair value of the assets transferred is concentrated in the

shipping vessel. As a result, the receivable is an in substance nonfinancial asset, and the contract is

fully within scope of ASC 610-20.

If a contract includes the transfer of ownership interests in consolidated subsidiaries that do not qualify as

businesses as well as other nonfinancial assets, an entity should first look at the subsidiaries’ underlying

assets to determine whether substantially all of the fair value of those assets, combined with the separate

other nonfinancial assets transferred in the contract, result in substantially all of the fair value of the

transferred assets being concentrated in nonfinancial assets. If that is the case, then the contract will be

fully within the scope of ASC 610-20.

Transfer of multiple subsidiaries: Contract fully within scope of ASC 610-20

Entity A enters into a contract to transfer a building and ownership interests in consolidated Subsidiaries

B and C to a counterparty who is not a customer of Entity A. The assets of Subsidiary B are all

nonf inancial assets, while the assets of Subsidiary C are all f inancial assets. Neither subsidiaries B nor

C comprise a business. The fair value of the assets of the building being transferred, combined with the

fair value of Subsidiary B’s assets being transferred, represent substantially all of the fair value of the

total assets being transferred in the contract. As a result, the assets of Subsidiary C are in-substance

nonf inancial assets, and the contract is fully within scope of ASC 610-20.

1.2.2 Contracts partially within scope of ASC 610-20

A contract that includes the transfer of nonfinancial or in substance nonfinancial assets that are within the

scope of ASC 610-20 may also include promises to transfer either nonfinancial assets that are not within

the scope of ASC 610-20 or financial assets that are not in substance nonfinancial assets. These

contracts are only partially within the scope of ASC 610-20. When a contract is not fully within the scope

of ASC 610-20, the entity should assess the various promises within the contract to determine which

guidance to apply to each promise within the contract. The entity should then separate and measure the

parts of the contract that are accounted for under other guidance, which might result in applying different

guidance to different promises within the contract.

ASC 610-20-15-9

If the promises to a counterparty in a contract are not all nonfinancial assets or all nonfinancial assets

and in substance nonfinancial assets, a contract may be partially within the scope of this Subtopic and

partially within the scope of other Topics. For example, in addition to transferring nonfinancial assets

and in substance nonfinancial assets that are within the scope of this Subtopic, an entity may issue a

15

guarantee to the counterparty that is within the scope of Topic 460 on guarantees. An entity shal l apply

the guidance in paragraph 606-10-15-4 to determine how to separate and measure one or more parts

of a contract that are within the scope of other Topics.

When a contract includes promises that are outside the scope of ASC 610-20, entities should apply the

guidance in ASC 606-10-15-4 to determine how to separate and measure the parts of the contract that

are accounted for under other guidance.

ASC 606-10-15-4

A contract with a customer may be partially within the scope of this Topic and partially within the scope

of other Topics listed in paragraph 606-10-15-2:

a. If the other Topics specify how to separate and/or initially measure one or more parts of the

contract, then an entity shall first apply the separation and/or measurement guidance in those

Topics. An entity shall exclude from the transaction price the amount of the part (or parts) of the

contract that are initially measured in accordance with other Topics and shall apply paragraphs

606-10-32-28 through 32-41 to allocate the amount of the transaction price that remains (if any) to

each performance obligation within the scope of this Topic and to any other parts of the contract

identified by paragraph 606-10-15-4(b).

b. If the other Topics do not specify how to separate and/or initially measure one or more parts of the

contract, then the entity shall apply the guidance in this Topic to separate and/or initially measure

the part (or parts) of the contract.

Figure 1.2: Evaluating ‘substantially all’ in transfer of multiple assets

The following flowchart illustrates the evaluation of a contract that includes nonfinancial assets, in

substance nonfinancial assets, and a promise that is outside the scope of ASC 610-20.

16

Is substantially all of the fair value of all assets

(looking through any consolidated subsidiaries)

promised in the contract concentrated

in nonfinancial assets?

Identify (1) any consolidated subsidiaries

for whom substantially all of its underlying

assets are concentrated in nonfinancial

assets and (2) any other nonfinancial

assets not held in an entity

Apply other appropriate GAAP to any other

assets promised in the contract

The entire contract is in the

scope of ASC 610-20

The derecognition of (1) and (2) are in

the scope of ASC 610-20

No

Yes

Example 1—Scope

Case A—Nonfinancial Assets, In Substance Nonfinancial Assets, and a Guarantee

ASC 610-20-55-2

Seller enters into a contract to transfer real estate, the related operating leases, and accounts

receivable to Buyer. Seller guarantees Buyer that the cash flows of the property will be sufficient

to meet all of the operating needs of the property for two years after the sale. In the event that the

cash f lows are not sufficient, Seller is required to make a payment in the amount of the shortfall.

ASC 610-20-55-3

Seller concludes that the assets promised in the contract are not a business within the scope of

Topic 810 on consolidation and are not an output of Seller’s ordinary activities within the scope of

Topic 606 on revenue from contracts with customers. In addition, assume that Seller concludes that

substantially all of the fair value of the assets promised in the contract is concentrated in nonfinancial

assets (that is, substantially all of the fair value is concentrated in the real estate and in-place lease

intangible assets). Therefore, the accounts receivable promised in the contract are in substance

nonf inancial assets. In accordance with the guidance in this Subtopic, all of the assets in the contract,

including the accounts receivable, are within the scope of this Subtopic.

ASC 610-20-55-4

Seller concludes that the guarantee, which is a liability of Seller, is within the scope of Topic 460 on

guarantees. Therefore, Seller would apply the guidance in paragraph 606-10-15-4 to separate and

measure the guarantee as described in paragraph 610-20-15-9.

17

If a contract includes financial assets that are not in substance nonfinancial assets as well as nonfinancial

assets, the nonfinancial assets are accounted for under ASC 610-20, while the guidance in ASC 606

should be used to separate and measure the financial assets, as illustrated in the following example. An

entity would then apply ASC 860 regarding derecognition of the financial assets.

Example 1—Scope

Case B—Nonfinancial Assets and Financial Assets

ASC 610-20-55-6

Entity X enters into a contract to transfer machinery and financial assets, both of which have

significant fair value. Entity X concludes that the assets promised in the contract are not a business

within the scope of Topic 810 and are not an output of the entity’s ordinary activities within the scope

of Topic 606. Entity X also concludes that substantially all of the fair value of the assets promised in

the contract is not concentrated in nonfinancial assets. Therefore, the financial assets promised in the

contract are not in substance nonfinancial assets.

ASC 610-20-55-7

In accordance with the guidance in paragraph 610-20-15-9, Entity X should derecognize only the

machinery in accordance with this Subtopic. Entity X should apply the guidance in paragraph 606-10-

15-4 to separate and measure the financial assets.

If a contract transfers ownership interests in multiple subsidiaries that are not considered to be

businesses, an entity should first consider whether substantially all of the fair value of the assets

transferred in the contract is concentrated in nonfinancial assets in determining which accounting

guidance applies. An entity should look through its consolidated subsidiaries included in the contract and

evaluate the subsidiaries’ assets to determine whether the fair value of the assets transferred is

concentrated in nonfinancial assets. If not, the entity should separately evaluate each subsidiary to

determine if the assets in those subsidiaries are nonfinancial assets and in substance nonfinancial

assets.

The following example illustrates the application of this guidance to the sale of two subsidiaries.

Example 1—Scope

Case C—One Subsidiary That Holds Nonfinancial Assets and One Subsidiary That Holds

Financial Assets

ASC 610-20-55-9

Entity A enters into a contract to transfer ownership interests in two consolidated subsidiaries to a

single counterparty. Subsidiary 1 consists entirely of nonfinancial assets, and Subsidiary 2 consists

entirely of financial assets. Assume that the assets in Subsidiary 1 and Subsidiary 2 have an equal

amount of fair value. Entity A concludes that the transaction is not the transfer of a business within the

scope of Topic 810 and that the subsidiaries are not outputs of the entity’s ordinary activities within the

scope of Topic 606.

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ASC 610-20-55-10

Entity A first considers whether substantially all of the fair value of the assets promised to the

counterparty in the contract is concentrated in nonfinancial assets. Because the contract includes

the transfer of ownership interests in one or more consolidated subsidiaries, Entity A evaluates the

underlying assets in those subsidiaries. Entity A concludes that because both the financial assets and

nonf inancial assets have an equal amount of fair value, substantially all of the fair value of the assets

promised to the counterparty in the contract is not concentrated in nonfinancial assets. Entity A next

considers whether substantially all of the fair value of the assets within Subsidiary 1 or Subsidiary 2 is

concentrated in nonfinancial assets. Because the assets transferred within Subsidiary 1 are entirely

nonf inancial assets, Entity A concludes that those assets are within the scope of this Subtopic. Entity A

also concludes that the financial assets in Subsidiary 2 are not in substance nonfinancial assets and,

therefore, are not within the scope of this Subtopic. Entity A should apply the guidance in paragraph

606-10-15-4 to separate and measure the financial assets in Subsidiary 2 f rom the nonf inancial assets

in Subsidiary 1 that are derecognized within the scope of this Subtopic.

19

2. Derecognizing the asset

The guidance in ASC 610-20 on derecognizing nonfinancial and in substance nonfinancial assets relies

on the derecognition concepts in ASC 606. The FASB chose to align the accounting in ASC 610-20 with

the guidance in ASC 606 so that the sale of assets that are not part of an entity’s ordinary activities would

not be accounted for differently from the sale of assets that are an output of the entity’s ordinary activities.

The guidance in ASC 610-20 for recognizing a gain or loss on the transfer of assets requires an

entity that transfers assets in the scope of ASC 610-20 (the transferor) to determine whether it should

derecognize the transferred assets via a two-step analysis. First, a transferor should apply the guidance

in ASC 810 to determine it has a controlling financial interest in the separate legal entity that holds the

transferred assets following the transaction. Second, if a transferor does not have a controlling financial

interest in the separate legal entity that holds the transferred assets following the transaction, the

transferor should derecognize each distinct asset when it transfers control of the asset in accordance with

the guidance in ASC 606.

ASC 610-20-25-1

To recognize a gain or loss from the transfer of nonfinancial assets or in substance nonfinancial

assets within the scope of this Subtopic, an entity shall apply the guidance in Topic 810 on

consolidation and in Topic 606 on revenue from contracts with customers as described in paragraphs

610-20-25-2 through 25-7.

2.1 Accounting when an entity retains control of assets in a separate legal

entity

As a f irst step in applying the guidance in ASC 610-20, a transferor must evaluate whether it has a

controlling financial interest in the separate legal entity that holds the transferred assets following the

transaction, in accordance with ASC 810. If the transferor has a controlling financial interest in the legal

entity that holds the assets that are being transferred, a sale has not occurred.

ASC 610-20-25-2

An entity shall first evaluate whether it has (or continues to have) a controlling financial interest in the

legal entity that holds the nonfinancial assets and/or in substance nonfinancial assets by applying the

guidance in Topic 810 on consolidation. For example, if a parent transfers ownership interests in a

consolidated subsidiary the parent shall evaluate whether it continues to have a controlling financial

interest in that subsidiary. Similarly, when an entity transfers assets directly to a counterparty (or a

legal entity formed by the counterparty), the entity shall evaluate whether it has a controlling financial

interest in the counterparty (or the legal entity formed by the counterparty).

20

ASC 610-20-25-3

If an entity determines it has (or continues to have) a controlling financial interest in the legal entity that

holds the nonfinancial assets or in substance nonfinancial assets, it shall not derecognize those assets

and shall apply the guidance in paragraphs 810-10-45-21A through 45-24.

If an entity that transfers assets has a controlling financial interest in the separate legal entity that

holds the transferred assets following the transaction, the transferring entity should not derecognize

the transferred assets. Instead, the entity should consolidate the separate legal entity following the

transaction and account for the transaction as an issuance of a noncontrolling interest in the consolidated

separate legal entity in accordance with the guidance in ASC 810-10-45-21A through 45-24.

Noncontrolling Interest

The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A

noncontrolling interest is sometimes called a minority interest

The following example illustrates a transaction when the transferor obtains a controlling financial interest

in the legal entity that holds the transferred nonfinancial assets, and therefore applies the guidance in

ASC 810.

Entity retains a controlling financial interest in assets transferred

Entity A transfers a building and land to a variable-interest entity (VIE) established by Entity B. The VIE

will use and operate the building, but Entity A will be the primary beneficiary of the VIE. Because Entity

A continues to have a controlling financial interest in the transferred assets, a sale has not occurred

under ASC 610-20. Instead, Entity A will account for the transaction as an equity transaction, namely,

the issuance of a noncontrolling interest in the VIE (a consolidated subsidiary of Entity A) to Entity B, in

accordance with the guidance in ASC 810-10-45-21A through 45-24.

2.2 Accounting when an entity does not retain control of assets in a separate

legal entity

If a transferor does not have control over the separate legal entity that holds the assets following the

transaction, it should then proceed to the next step within ASC 610-20 to determine whether a contract

exists and control has transferred by applying the guidance in paragraphs 610-20-25-2 through 25-7.

ASC 610-20-25-4

Any nonfinancial assets or in substance nonfinancial assets transferred that are held in a legal entity

in which the entity does not have (or ceases to have) a controlling financial interest shall be further

evaluated in accordance with the guidance in paragraphs 610-20-25-5 through 25-7.

21

2.2.1 Determining whether a contract exists

If an entity determines that a transaction falls within the scope of ASC 610-20 and that the transferor does

not have control over the legal entity that holds the assets, the next step is to consider whether the

contract meets the definition of an “accounting contract” in ASC 606.

ASC 610-20-25-5

After applying the guidance in paragraphs 610-20-25-2 through 25-4, an entity shall next evaluate a

contract in accordance with the guidance in paragraphs 606-10-25-1 through 25-8. If a contract does

not meet all of the criteria in paragraph 606-10-25-1, an entity shall not derecognize the nonfinancial

assets or in substance nonfinancial assets transferred, and it shall apply the guidance in paragraph

350-10-40-3 to any intangible assets and the guidance in paragraph 360-10-40-3C to any property,

plant, and equipment. An entity shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to

determine if and when a contract subsequently meets all of the criteria in paragraph 606-10-25-1.

The guidance in ASC 610-20 relies on several concepts in ASC 606, including the assessment of whether

an accounting contract exists. ASC 606 defines a “contract” as an agreement between two or more

parties that creates enforceable rights and obligations. Enforceability is an issue grounded in law, so an

entity needs to consider the relevant local legal environment to determine whether rights and obligations

are enforceable.

To assist entities in determining whether a contract exists, the guidance in ASC 606 specifies five criteria

that the arrangement must meet. If the arrangement does not meet all five criteria, an accounting contract

does not exist, even though a legal contract may exist:

• The parties have approved the contract and are committed to perform their contractual obligat ions.

• The entity can identify each party’s rights.

• The entity can identify the payment terms.

• The contract has commercial substance.

• It is probable that the entity will collect substantially all of the consideration to which it expects to be

entitled.

ASC 606-10-25-1

An entity shall account for a contract with a customer that is within the scope of this Topic only when all

of the following criteria are met:

a. The parties to the contract have approved the contract (in writing, orally, or in accordance with

other customary business practices) and are committed to perform their respective obligations.

b. The entity can identify each party’s rights regarding the goods or services to be transferred.

c. The entity can identify the payment terms for the goods or services to be transferred.

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d. The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future

cash f lows is expected to change as a result of the contract).

e. It is probable that the entity will collect substantially all of the consideration to which it will be

entitled in exchange for the goods or services that will be transferred to the customer (see

paragraphs 606-10-55-3A through 55-3C). In evaluating whether collectibility of an amount of

consideration is probable, an entity shall consider only the customer’s ability and intention to pay

that amount of consideration when it is due. The amount of consideration to which the entity will

be entitled may be less than the price stated in the contract if the consideration is variable because

the entity may offer the customer a price concession (see paragraph 606-10-32-7).

23

Figure 2.1: Criteria for recognizing a contract

If the contract meets the criteria in ASC 606-10-25-1, then each asset should be derecognized when

control of the asset is transferred to the counterparty in accordance with ASC 606 (see Section 2.4).

The impact of collectibility on the contract assessment

In determining whether a contract exists under ASC 606, an entity must assess whether it is probable that

it will collect substantially all of the consideration to which it is entitled (the collectibility assessment). As

part of the collectibility assessment, an entity must evaluate at contract inception whether it expects to

provide a price concession that will cause it to receive less than the full contract price from the

Can the entity identify each party’s rights regarding the goods/services to be transferred?

Consider if the contract meets each of the f ive criteria in ASC 606-10-25-1:

Have the parties approved the contract?

Can the entity identify the payment terms for the goods/services to be transferred?

Does the contract have commercial substance?

Is it probable that the entity will collect substantially all of the consideration to which it will be entitled

in exchange for the goods/services that will be transferred to the customer?

Identify each distinct nonfinancial asset and distinct in substance nonfinancial asset promised

to a counterparty in accordance with the guidance in paragraphs 606-10-25-19 through 25-22 (Section 2.3)

Y

Y

Y

Y

Y

N

Apply the guidance in

ASC 350-10-40-3

to any intangible assets

and apply the guidance in

ASC 360-10-40-3C

to any property, plant,

and equipment

N

N

N

N

Continue to assess the contract to determine if the criteria are met.

24

counterparty. Given that sales of nonfinancial and in substance nonfinancial assets within the scope of

ASC 610-20 are not associated with the output of the normal operations of an entity, many of the typical

incentives an entity may have for offering price concessions (encouraging future sales to the customer,

for example) are not present. Accordingly, while an entity must evaluate all relevant facts and

circumstances, price concessions are not common in transactions within the scope of ASC 610-20.

Grant Thornton insights: Price concession versus collectibility issue

It can sometimes be difficult to distinguish between a price concession and a collectibility issue. The

ramif ications could impact the accounting because one path (a collectibility concern) might lead an

entity to conclude that a contract does not exist and a sale has not occurred, while another path (a

price concession) might result in variable consideration, which would allow the entity to derecognize

the asset with a lower transaction price. Judgment will be required to determine which path is

appropriate.

When it comes to assessing whether an entity has offered, or expects to offer, a price concession in

the sale of a nonfinancial asset (for example, real estate), an entity must consider its ability and intent

to repossess the asset should the counterparty fail to pay the full contractual price. Generally, an entity

that has sold real estate will not accept less than the contractual amount for the assets transferred to

the counterparty. Instead, the transferor (or the entity providing financing for the transaction) will

repossess the asset and pursue the transferee (or the borrower) for any further deficiency rather than

accept a lower price, which indicates that the transferor has accepted the transferee’s credit risk and is

not providing a price concession.

However, while an entity’s ability and intent to repossess a transferred nonfinancial asset may support

an assertion that an entity has not provided an implicit price concession, an entity may not consider

assets received through repossession when assessing collectibility—that is, whether it expects to

collect substantially all of the consideration to which it is entitled under the terms of the contract.

Arrangements that are not an accounting contract

If the arrangement does not meet the criteria regarding the existence of a contract with a customer in

606-10-25-1, an accounting contract does not exist, even though a legal contract may exist. If an

accounting contract does not exist, the entity should apply the guidance in ASC 350-10-40-3 to account

for any intangible assets and the guidance in ASC 360-10-40-3C to account for property, plant, and

equipment. Under both sets of guidance, the entity should not derecognize the asset and should account

for any consideration received as a deposit liability.

ASC 350-10-40-3

If an entity transfers a nonfinancial asset in accordance with paragraph 350-10-40-1, and the

contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize

the nonf inancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to

determine if and when the contract subsequently meets all of the criteria in paragraph 606-10-25-1.

Until all of the criteria in paragraph 606-10-25-1 are met, the entity shall continue to do all of the

following:

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a. Report the nonfinancial asset in its financial statements

b. Recognize amortization expense as a period cost for those assets with a f inite life

c. Apply the impairment guidance in Section 350-30-35.

ASC 360-10-40-3C

If an entity transfers a nonfinancial asset in accordance with paragraph 360-10-40-3A, and the

contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize the

nonf inancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine

if and when the contract subsequently meets all the criteria in paragraph 606-10-25-1. Until all the

criteria in paragraph 606-10-25-1 are met, the entity shall continue to do all of the following:

a. Report the nonfinancial asset in its financial statements

b. Recognize depreciation expense as a period cost unless the assets have been classified as held

for sale in accordance with paragraphs 360-10-45-9 through 45-10

c. Apply the impairment guidance in Section 360-10-35.

2.2.2 Identifying distinct nonfinancial assets and in substance nonfinancial assets

Once an entity determines that a contract exists, the next step is to identify the distinct assets promised to

the counterparty, in accordance with the guidance on identifying performance obligations in ASC 606.

ASC 610-20-25-6 (excerpt)

Once a contract meets all of the criteria in paragraph 606-10-25-1, an entity shall identify each

distinct nonfinancial asset and distinct in substance nonfinancial asset promised to a counterparty

in accordance with the guidance in paragraphs 606-10-25-19 through 25-22.

ASC 606 includes two criteria that must be met in order for an asset promised to a counterparty to be

considered “distinct”: (1) the asset must be capable of being distinct, and (2) the asset must be distinct

within the context of the contract. An entity must identify each distinct asset in the contract because the

assessment of when control has transferred is performed at the level of each distinct asset in the

contract.

ASC 606-10-25-19

A good or service that is promised to a customer is distinct if both of the following criteria are met:

a. The customer can benefit from the good or service either on its own or together with other

resources that are readily available to the customer (that is, the good or service is capable of

being distinct).

26

b. The entity’s promise to transfer the good or service to the customer is separately identifiable from

other promises in the contract (that is, the good or service is distinct within the context of the

contract).

However, if control of all of the assets transfers at the same time, the entity may not need to assess

whether the assets are distinct since the recognition would be the same.

ASC 610-20-25-6 (excerpt)

In some cases, control of each asset may transfer at the same time such that an entity may not

need to separate and allocate consideration to each distinct nonfinancial asset and in substance

nonf inancial asset. That may be the case, for example, when a parent transfers ownership interests

in a consolidated subsidiary that holds nonfinancial assets (or nonfinancial assets and in substance

nonf inancial assets) and ceases to have a controlling financial interest in the subsidiary in accordance

with Topic 810. However, control of each asset may not transfer at the same time if the parent has

control of some of the assets in accordance with paragraph 606-10-25-30 (for example, through

repurchase agreements).

The following example showcases a contract that transfers multiple assets concurrently so that the entity

does not need to evaluate whether the assets are distinct.

Entity sells a building concurrently with related leases and lease receivables

Entity C transfers to Entity D its ownership interest in a subsidiary comprising a building, the related

operating leases, and lease receivables. The subsidiary does not meet the definition of a business in

ASC 805. Entity C does not sell real estate as part of its ordinary course of business, meaning that the

arrangement is not a contract with a customer accounted for under ASC 606. Substantially all of the fair

value of the assets is concentrated in the building and related operating leases; therefore, the lease

receivables (which are financial assets) are considered in substance nonfinancial assets. As a result,

the sale of all of the assets promised in the contract is accounted for under ASC 610-20.

While the building, operating leases, and the lease receivables may all (1) be capable of being distinct

and (2) distinct within the context of the contract, according to the criteria for what in ASC 606, control of

all three assets transfers to Entity D on the closing date. As a result, Entity C does not need to allocate

the transaction price among the distinct nonfinancial and in substance nonfinancial assets.

There may be situations where an entity combines a distinct good or service with nondistinct goods or

services to arrive at a bundle of distinct goods or services. If a promised asset is not deemed to be

distinct, the guidance in ASC 606 requires an entity to combine that asset with other promised assets until

it identifies a bundle that is distinct. As noted in ASC 606-10-25-22, sometimes that may result in an entity

combining all of the assets in a contract.

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ASC 606-10-25-22

If a promised good or service is not distinct, an entity shall combine that good or service with other

promised goods or services until it identifies a bundle of goods or services that is distinct. In some

cases, that would result in the entity accounting for all the goods or services promised in a contract as

a single performance obligation.

Capable of being distinct

The f irst criterion for being “distinct” in ASC 606 is that the counterparty can benefit from the asset either

on its own or together with other resources that are readily available (that is, the asset is capable of being

distinct). A counterparty can benefit from an asset on its own if the asset can be used, consumed, sold for

an amount greater than scrap value, or otherwise held in a way that generates economic benefits.

Sometimes, a counterparty can benefit from an asset only with other readily available resources. A

“readily available resource” is a good or service that is sold separately (by the entity or by another entity)

or one that the counterparty has already obtained from the entity or from other events or transactions.

The assessment of whether the counterparty can benefit from an asset on its own should be based on the

characteristics of the asset itself, excluding contractual limitations that might preclude the counterparty

f rom obtaining readily available resources from a source other than the entity.

Distinct within the context of the contract

In some situations, separately accounting for each asset that is capable of being distinct would not

faithfully represent the entity’s performance in the contract. As a result, the FASB developed a second

criterion that must be met for an entity to conclude that an asset is distinct: The entity’s promise to

transfer the asset to the counterparty is separately identifiable from other promises in the contract—that

is, the promise to transfer the asset is distinct within the context of the contract.

In assessing whether an entity’s promise to transfer an asset to the counterparty is distinct within the

context of the contract, the objective is to determine whether the nature of the contractual promise is to

transfer each of the assets individually or to transfer a combined item in which the promised assets are

inputs. Significant judgment may be required to determine whether promised assets are distinct within the

context of the contract.

The guidance in ASC 606 provides factors that indicate a promise to transfer assets is not separately

identifiable from other assets in the contract.

ASC 606-10-25-21

In assessing whether an entity’s promises to transfer goods or services to the customer are separately

identifiable in accordance with paragraph 606-10-25-19(b), the objective is to determine whether the

nature of the promise, within the context of the contract, is to transfer each of those goods or services

individually or, instead, to transfer a combined item or items to which the promised goods or services

are inputs. Factors that indicate that two or more promises to transfer goods or services to a customer

are not separately identifiable include, but are not limited to, the following:

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a. The entity provides a significant service of integrating goods or services with other goods or

services promised in the contract into a bundle of goods or services that represent the combined

output or outputs for which the customer has contracted. In other words, the entity is using the

goods or services as inputs to produce or deliver the combined output or outputs specified by the

customer. A combined output or outputs might include more than one phase, element, or unit.

b. One or more of the goods or services significantly modifies or customizes, or are significantly

modified or customized by, one or more of the other goods or services promised in the contract.

c. The goods or services are highly interdependent or highly interrelated. In other words, each of

the goods or services is significantly affected by one or more of the other goods or services in the

contract. For example, in some cases, two or more goods or services are significantly affected by

each other because the entity would not be able to fulfill its promise by transferring each of the

goods or services independently.

The following example illustrates the identification of multiple “distinct” assets in a single transaction.

Entity sells multiple assets in a single transaction

Entity E enters into an agreement to sell two pieces of machinery to Entity F. The machines are not

an output of Entity E’s ordinary activities, and, as a result, Entity E concludes that the transaction is

outside the scope of ASC 606 and within the scope of ASC 610-20. Entity E considers the guidance in

ASC 606-10-25-1 and concludes that a contract exists with Entity F with regard to the sale of the two

machines.

Control of the first machine will be transferred on 12/15/20X8 and control of the second machine will be

transferred six months later on 6/15/20X9.

In evaluating whether the two pieces of machinery are distinct, Entity E concludes that the counterparty

could benefit from each asset on its own or with other readily available resources the assets, so that the

assets are capable of being distinct. Entity E further concludes that the assets are distinct within the

context of the contract because (1) Entity E does not provide a significant integration service with

respect to the assets, and (2) the assets do not modify or customize one another and are not highly

interdependent or highly interrelated. Therefore, Entity E concludes that the assets are distinct and

allocates the transaction price between the two pieces of machinery based on their stand-alone selling

prices. Entity E recognizes a gain or loss on the sale of each machine when control of the machinery

transfers.

2.2.3 Assessing when control transfers

Once an entity identifies the distinct assets in a contract, it should apply the guidance in ASC 606 to

determine when control transfers for each distinct asset.

ASC 610-20-25-6 (excerpt)

An entity shall derecognize each distinct asset when it transfers control of the asset in accordance with

paragraph 606-10-25-30.

29

In performing this evaluation, the entity should consider relevant factors that indicate control

has transferred to the counterparty, including, but not limited to, the following enumerated in

ASC 606-10-25-30:

• The entity has a present right to receive payment for the asset.

• The counterparty has legal title to the asset.

• The counterparty has physical possession of the asset.

• The counterparty has assumed the significant risks and rewards of owning the asset.

• The counterparty has accepted the asset.

An entity will generally only have a present right to receive payment from the counterparty once the

counterparty has obtained control over the asset.

Possession of legal title of an asset generally indicates which party controls the asset. However, if an

entity retains legal title only to protect itself against the counterparty’s failure to pay, this would not

prevent the customer from obtaining control of the asset.

Similarly, the counterparty’s physical possession of an asset may indicate that the counterparty controls

the asset because it can direct the use of the asset, obtain substantially all of the remaining benefits of

the asset, and/or restrict other entities’ access to the benefits of the asset; however, the entity must

consider if anything overrides this presumption. For example, a counterparty’s physical possession of an

asset does not automatically mean that it has control of the asset if substantive repurchase terms suggest

that control remains with the entity.

When a counterparty assumes the significant risks and rewards of owning the asset, this may indicate

that the counterparty controls the asset and has the ability to direct the use of, and obtain substantially all

of the remaining benefits from, the asset.

Given the nature of nonfinancial and in substance nonfinancial assets, ASC 610-20 presumes that the

transfer of control will occur at a point in time, rather than over time.

ASC 606-10-25-30

If a performance obligation is not satisfied over time in accordance with paragraphs 606-10-25-27

through 25-29, an entity satisfies the performance obligation at a point in time. To determine the point

in time at which a customer obtains control of a promised asset and the entity satisfies a performance

obligation, the entity shall consider the guidance on control in paragraphs 606-10-25-23 through 25-26.

In addition, an entity shall consider indicators of the transfer of control, which include, but are not

limited to, the following:

a. The entity has a present right to payment for the asset—If a customer presently is obliged to pay

for an asset, then that may indicate that the customer has obtained the ability to direct the use of,

and obtain substantially all of the remaining benefits from, the asset in exchange.

b. The customer has legal title to the asset—Legal title may indicate which party to a contract has the

ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to

restrict the access of other entities to those benefits. Therefore, the transfer of legal title of an asset

30

may indicate that the customer has obtained control of the asset. If an entity retains legal title solely

as protection against the customer’s failure to pay, those rights of the entity would not preclude the

customer from obtaining control of an asset.

c. The entity has transferred physical possession of the asset—The customer’s physical

possession of an asset may indicate that the customer has the ability to direct the use of, and

obtain substantially all of the remaining benefits from, the asset or to restrict the access of other

entities to those benefits. However, physical possession may not coincide with control of an

asset. For example, in some repurchase agreements and in some consignment arrangements,

a customer or consignee may have physical possession of an asset that the entity controls.

Conversely, in some bill-and-hold arrangements, the entity may have physical possession of

an asset that the customer controls. Paragraphs 606-10-55-66 through 55-78, 606-10-55-79

through 55-80, and 606-10-55-81 through 55-84 provide guidance on accounting for repurchase

agreements, consignment arrangements, and bill-and-hold arrangements, respectively.

d. The customer has the significant risks and rewards of ownership of the asset—The transfer

of the significant risks and rewards of ownership of an asset to the customer may indicate that

the customer has obtained the ability to direct the use of, and obtain substantially all of the

remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership

of a promised asset, an entity shall exclude any risks that give rise to a separate performance

obligation in addition to the performance obligation to transfer the asset. For example, an entity

may have transferred control of an asset to a customer but not yet satisfied an additional

performance obligation to provide maintenance services related to the transferred asset.

e. The customer has accepted the asset—The customer’s acceptance of an asset may indicate

that it has obtained the ability to direct the use of, and obtain substantially all of the remaining

benef its from, the asset. To evaluate the effect of a contractual customer acceptance clause on

when control of an asset is transferred, an entity shall consider the guidance in paragraphs 606-10-

55-85 through 55-88.

None of the indicators discussed above is individually determinative; rather, an entity should consider all

of the indicators collectively to make a determination as to when control passes to the counterparty.

The following table provides additional guidance for each control indicator outlined in ASC 606 that may

suggest either the entity or the counterparty has control of the asset.

Indicator that

the entity maintains

control of the asset

Control

indicator

Indicator that

the counterparty

controls the asset

When the entity does not

yet have the right to demand

payment from the counterparty,

this may indicate that the entity

has not yet transferred control

of the asset.

Present right

to payment

When the counterparty is obligated

to pay for the asset, this may

indicate that the counterparty has

control.

31

Indicator that

the entity maintains

control of the asset

Control

indicator

Indicator that

the counterparty

controls the asset

When the entity maintains legal

title to the asset and the retention

is not solely as protection against

the counterparty’s failure to pay,

this may indicate that the entity

still maintains control.

Legal title When the counterparty obtains

legal title to the asset or the

entity maintains legal title only

for protection against the

counterparty’s failure to pay, this

may indicate that the counterparty

has obtained control.

When the entity maintains

physical possession of the asset,

this may indicate that the entity

still controls the asset.

Physical possession When the counterparty has

physical possession of the

asset, this may indicate that the

counterparty controls the asset;

however, in arrangements such as

repurchase agreements, physical

possession may not coincide with

control of an asset.

If the entity can still direct the

use of the asset and obtain

substantially all of the benefits

f rom the asset, this may indicate

that the entity still controls the

asset.

Significant risks and

rewards of ownership

If the counterparty can direct the

asset to another location or to

another party, if the counterparty

is exposed to changes in market

value, or if the counterparty is

responsible for damages to the

asset, this may indicate that the

counterparty has control of the

asset.

When the entity has not yet

satisfied substantive acceptance

provisions, this may indicate that

the entity still controls the asset.

Counterparty

acceptance

When the counterparty has

formally indicated that its

acceptance criteria have been

met, this may indicate that control

has transferred to the counterparty.

At the crossroads: Continuing involvement versus control assessment

Legacy GAAP included specific guidance in ASC 360-20 on how to account for a sale of real estate

when the seller does not transfer all of the risks and rewards of ownership but continues to be involved

with the property. That guidance often required the seller to reduce the profit recognized at the time of

the sale until sufficient risks and rewards of ownership were transferred to the buyer.

In contrast, under ASC 610-20, one of the indicators for determining whether control has transferred

(and therefore whether a gain or loss can be recognized) is that the risks and rewards of ownership

32

have transferred to the counterparty. If a seller has not transferred those risks and rewards, it must

carefully consider all other facts and circumstances to determine if and when control has transferred

and a gain or loss can be recognized. Unlike legacy GAAP, ASC 610-20 contains no model for partial

recognition of profit in such a situation, unless the transaction price is variable and subject to the

constraint guidance discussed in ASC 606. Under ASC 610-20, either control has transferred and a

gain or loss can be recognized, or control has not transferred and no gain or loss can be recognized.

2.2.4 Repurchase agreements

Sometimes an entity that enters into a contract to sell an asset also promises (or has the option) to

repurchase the same asset, an asset that is substantially the same, or another asset that is a component

of the original asset. Under ASC 610-20, an entity should apply the guidance in ASC 606 to evaluate the

form of the promise to repurchase the asset (for example, a forward, call option, or put option) in

determining the appropriate accounting.

Figure 2.2 illustrates the accounting for various types of repurchase rights and obligations.

Figure 2.2: Accounting for repurchase rights and obligations

Forwards or calls

If a contract includes a forward (an entity’s obligation to repurchase an asset) or a call option (an entity’s

right to repurchase an asset), an entity should account for the contract in one of two ways under

ASC 606:

N

Entity’s right or obligation to repurchase the asset (a call or forward)

Entity’s obligation to repurchase the asset at the customer’s request (a put option)

Repurchase price ≥ original selling price? Repurchase price ≥ original selling price and > expected market value at repurchase date?

Contract is accounted for as a f inancing

arrangement. Part of a sale-

leaseback?

Customer has a significant economic incentive to

exercise option?

Contract is accounted for as a lease.

Contract is accounted for as a sale with a

right of return.

Y

N Y

N N

Y

Y

33

• As a lease if it can or must repurchase the asset for an amount that is less than the original selling

price and the contract is not part of a sale-leaseback transaction

• As a f inancing arrangement if it can or must repurchase the asset for an amount that is equal to or

more than the original selling price

While the counterparty may have physical possession of the asset, it does not control the asset because

its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset is

limited due to the transferor’s repurchase obligation or right.

ASC 606-10-55-68

If an entity has an obligation or a right to repurchase the asset (a forward or a call option), a customer

does not obtain control of the asset because the customer is limited in its ability to direct the use of,

and obtain substantially all of the remaining benefits from, the asset even though the customer may

have physical possession of the asset. Consequently, the entity should account for the contract as

either of the following:

a. A lease in accordance with Topic 840 (842) on leases, if the entity can or must repurchase the

asset for an amount that is less than the original selling price of the asset unless the contract is

part of a sale-leaseback transaction. If the contract is part of a sale-leaseback transaction, the

entity should account for the contract as a financing arrangement and not as a sale-leaseback in

accordance with Subtopic 840-40 (842-40).

b. A f inancing arrangement in accordance with paragraph 606-10-55-70, if the entity can or must

repurchase the asset for an amount that is equal to or more than the original selling price of the

asset.

ASC 606-10-55-69

When comparing the repurchase price with the selling price, an entity should consider the time value of

money.

When an entity accounts for a forward or call repurchase agreement as a f inancing arrangement, it

continues to recognize the asset as well as a financial liability for any consideration received from the

counterparty. The entity recognizes the difference between the amount of consideration received from the

counterparty and the amount to be paid to the counterparty as interest. If the option lapses unexercised,

the entity derecognizes the liability and recognizes a sale of the asset resulting in a gain or loss.

ASC 606-10-55-70

If the repurchase agreement is a financing arrangement, the entity should continue to recognize the

asset and also recognize a f inancial liability for any consideration received from the customer. The

entity should recognize the difference between the amount of consideration received from the customer

and the amount of consideration to be paid to the customer as interest and, if applicable, as processing

or holding costs (for example, insurance).

34

ASC 606-10-55-71

If the option lapses unexercised, an entity should derecognize the liability and recognize revenue.

The following example illustrates how an entity applies the guidance in ASC 606 when it has a right to

repurchase an asset (a call option).

Entity has a right to repurchase asset

Entity G owns 100 percent of Entity H, a consolidated subsidiary that holds title to land with a carrying

amount of $10 million. The land is not an output of Entity G’s ordinary activities within the scope of

ASC 606, and Entity H does not meet the definition of a business.

Entity G enters into a contract to transfer 70 percent of Entity H to Entity J for $15 million. Because the

land is a nonfinancial asset, Entity G concludes that it should evaluate whether to derecognize the land

in accordance with ASC 610-20.

Entity G has the right, but not the obligation, to repurchase the 70 percent ownership interest in Entity H

that it transferred to Entity J (that is, Entity G has a call option). The call option gives Entity G the right to

repurchase the 70 percent ownership interest after two years for $18 million.

Entity G concludes that it no longer has a controlling financial interest in Entity H under ASC 810.

However, when evaluating whether control of the land has been transferred under ASC 606, Entity G

concludes that Entity J does not obtain control of the asset because Entity J is limited in its ability to

direct the use of, and obtain substantially all of the remaining benefits from, the asset due to the

repurchase option. Additionally, because the exercise price on the call option is an amount that is

greater than the original selling price, the transaction is considered a financing. Therefore, Entity G does

not derecognize the land and records a f inancial liability of $15 million. Additionally, Entity G does not

recognize an investment for its retained 30 percent ownership interest until it derecognizes the land.

Put options

The existence of a put option (an obligation to repurchase the asset at the customer’s request) in a

contract to sell a nonfinancial asset requires careful analysis to determine how the put right impacts the

accounting by the transferor.

ASC 606-10-55-72

If an entity has an obligation to repurchase the asset at the customer’s request (a put option) at a

price that is lower than the original selling price of the asset, the entity should consider at contract

inception whether the customer has a significant economic incentive to exercise that right. The

customer’s exercising of that right results in the customer effectively paying the entity consideration

for the right to use a specified asset for a period of time. Therefore, if the customer has a significant

economic incentive to exercise that right, the entity should account for the agreement as a lease in

accordance with Topic 842 on leases unless the contract is part of a sale and leaseback transaction.

If the contract is part of a sale and leaseback transaction, the entity should account for the contract as

35

a f inancing arrangement and not as a sale and leaseback transaction in accordance with Subtopic 842-

40.

ASC 606-10-55-73

To determine whether a customer has a significant economic incentive to exercise its right, an entity

should consider various factors, including the relationship of the repurchase price to the expected

market value of the asset at the date of the repurchase and the amount of time until the right expires.

For example, if the repurchase price is expected to significantly exceed the market value of the asset,

this may indicate that the customer has a significant economic incentive to exercise the put option.

ASC 606-10-55-74

If the customer does not have a significant economic incentive to exercise its right at a price that is

lower than the original selling price of the asset, the entity should account for the agreement as if it

were the sale of a product with a right of return as described in paragraphs 606-10-55-22 through

55-29.

ASC 606-10-55-75

If the repurchase price of the asset is equal to or greater than the original selling price and is more than

the expected market value of the asset, the contract is in effect a financing arrangement and, therefore,

should be accounted for as described in paragraph 606-10-55-70.

ASC 606-10-55-76

If the repurchase price of the asset is equal to or greater than the original selling price and is less

than or equal to the expected market value of the asset, and the customer does not have a significant

economic incentive to exercise its right, then the entity should account for the agreement as if it were

the sale of a product with a right of return as described in paragraphs 606-10-55-22 through 55-29.

ASC 606-10-55-77

When comparing the repurchase price with the selling price, an entity should consider the time value of

money.

ASC 606-10-55-78

If the option lapses unexercised, an entity should derecognize the liability and recognize revenue.

If a counterparty is granted the right to require an entity to repurchase the asset (a put option) at a price

that is less than the original selling price, the entity should assess whether the counterparty has a

significant economic incentive to exercise its right. This assessment takes into consideration various

factors, including the relationship between the repurchase price and the expected market value of the

asset at the date of repurchase. If the repurchase price is expected to significantly exceed market value,

then a significant economic incentive exists. The agreement is then accounted for as a lease (because

the counterparty is effectively paying the entity for the right to use the asset for a period of time), unless

the contract is a part of a sale-leaseback arrangement, in which case, the agreement is accounted for as

a f inancing arrangement. If the counterparty does not have a significant economic incentive to exercise

the put option, the entity accounts for the agreement as a sale with a right of return.

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Under ASC 606, a contract is considered a financing arrangement if both (1) the contract grants the

counterparty a put option, and (2) the repurchase price of the asset is equal to or greater than the original

selling price and exceeds the asset’s expected market value. In these circumstances, the entity should

continue to recognize the asset and a liability initially measured at the asset’s original selling price.

If either a call or put option expires unexercised, the entity should derecognize any liability recorded and

recognize the sale of the asset and the resulting gain or loss.

At the crossroads: Repurchase options no longer result in profit-sharing arrangements

Under legacy GAAP in ASC 360-20, the sale of real estate in which the seller has the option or

obligation to repurchase the property could be accounted for as a f inancing, leasing, or profit-sharing

arrangement. But, the guidance in ASC 606 eliminates the profit-sharing guidance in ASC 360-20,

meaning that transactions previously accounted for as profit-sharing arrangements must now be

reevaluated under the guidance in ASC 606 to determine if they should be accounted for as a financing

or leasing arrangement or a sale with a right of return.

Grant Thornton insights: Contingent repurchase agreements

The guidance in ASC 606 does not address how an entity should analyze its right or obligation to

repurchase an asset that can only be exercised if a contingent event occurs. For example, if a

contract includes a non-contingent call option, the guidance in ASC 606 precludes sale accounting, but

does not address whether a contingent call option would also preclude an entity from recognizing a

sale.

We believe that an arrangement with a contingent call option where the contingency is based on

factors controlled by the entity, should be accounted for as a lease or a f inancing arrangement in

accordance with the guidance in ASC 606-10-55-68. Alternatively, a contingent repurchase option

where the contingency is based on factors controlled by the counterparty, should be accounted for as a

put option in accordance with the guidance in ASC 606-10-55-72 through 55-77.

In assessing arrangements with contingent repurchase options where neither the entity nor the

counterparty controls the factors that impact the contingency, an entity should consider such factors as

the nature of the contingency and the likelihood of occurrence to determine whether the existence of

the repurchase option limits the counterparty’s ability to direct the use of, and obtain substantially all of

the remaining benefits from, the asset, therefore precluding the counterparty from obtaining control of

the asset.

2.3 Partial sales

A transaction is considered a partial sale if an entity transfers a controlling financial interest, but retains a

noncontrolling interest, in a subsidiary that has only nonfinancial assets and in substance nonfinancial

assets. According to the guidance in ASC 610-20-32-4, if a parent transfers control of a distinct

nonf inancial asset or an in substance nonfinancial asset by transferring ownership interests in a

consolidated subsidiary, but retains a noncontrolling interest in its former subsidiary, the noncontrolling

interest retained by the entity is accounted for as noncash consideration.

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Applying the noncash consideration guidance in ASC 606-10-32-21 through 32-24 to a partial sale

requires entities to use the fair value of the noncontrolling interest received in calculating the gain or loss

to be recognized on a transaction, as demonstrated by the following example.

Entity retains a noncontrolling interest financial interest in assets transferred

Entity K transfers to Entity M 60 percent of an equity interest in its previously wholly owned Subsidiary L.

Subsidiary L contains only a building and the land on which the building sits, both of which are

nonf inancial assets that are not an output of Entity K’s ordinary operations. Additionally, Subsidiary L

does not constitute a business as defined in ASC 805, and therefore the transaction falls within the

scope of ASC 610-20.

Entity M obtains control of 60 percent of the voting stock in Subsidiary L, but Entity K retains a

40 percent voting interest.

Entity K determines that as of the closing date, it ceases to have a controlling financial interest in

Subsidiary L under the guidance in ASC 810 and that control over the nonfinancial assets has

transferred to Entity M under the guidance in ASC 610-20.

In exchange for the 60 percent interest in Subsidiary L, Entity K receives $20 million in cash. The

carrying value of the land and building is $25 million and the fair value of the 40 percent voting interest

that is retained is $15 million. The gain on the sale is calculated as follows:

Cash received $ 20

Fair value of 40% interest retained 15

Carrying amount of Subsidiary L’s

assets (25)

Gain $ 10

At the crossroads: Partial sales no longer result in partial gains

Entities that engage in partial sales, which is especially common in the real estate industry, may see a

significant change in their accounting under ASC 610-20. Under the legacy guidance in ASC 360-20,

entities generally recognized a partial gain or loss on a partial sale of real estate because the

noncontrolling interest was not remeasured at fair value, but rather continued to be recognized at its

historical carrying amount (or “carryover basis”). ASC 610-20 aligns the guidance for partial sales of

nonf inancial assets with the general guidance regarding sales of nonfinancial assets by requiring

entities to recognize the full gain or loss on all partial sales by eliminating the use of carryover basis

for any retained interest in the legal entity.

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3. Calculating the gain or loss

Once an entity identifies a nonfinancial and in substance nonfinancial asset to be derecognized and

assesses when control transfers, it should calculate the gain or loss on the transaction as the difference

between the amount of consideration to which it is entitled and the carrying amount of the asset. The

amount of consideration includes the transaction price calculated in accordance with ASC 606 and the

carrying amount of any liabilities assumed or relieved by the counterparty.

ASC 610-20-32-2

When an entity meets the criteria to derecognize a distinct nonfinancial asset or a distinct in

substance nonfinancial asset, it shall recognize a gain or loss for the difference between the amount

of consideration measured and allocated to that distinct asset in accordance with paragraphs 610-20-

32-3 through 32-6 and the carrying amount of the distinct asset. The amount of consideration promised

in a contract that is included in the calculation of a gain or loss includes both the transaction price and

the carrying amount of liabilities assumed or relieved by a counterparty.

3.1 Transaction price

In order to calculate the gain or loss on the sale of an asset, an entity must calculate the transaction price

following the guidance in ASC 606-20-32-3.

ASC 610-20-32-3

To determine the transaction price, an entity shall apply the following paragraphs in Topic 606 on

revenue f rom contracts with customers:

a. Paragraphs 606-10-32-2 through 32-27 on determining the transaction price, including all of the

following:

1. Estimating variable consideration

2. Constraining estimates of variable consideration

3. The existence of a significant financing component

4. Noncash consideration

5. Consideration payable to a customer.

b. Paragraphs 606-10-32-42 through 32-45 on accounting for changes in the transaction price.

39

An entity estimates the transaction price at contract inception and updates the estimate each reporting

period to reflect changes in facts and circumstances.

ASC 606-10-32-2

An entity shall consider the terms of the contract and its customary business practices to determine the

transaction price. The transaction price is the amount of consideration to which an entity expects to be

entitled in exchange for transferring promised goods or services to a customer, excluding amounts

collected on behalf of third parties (for example, some sales taxes). The consideration promised in a

contract with a customer may include fixed amounts, variable amounts, or both.

When determining the transaction price, an entity first identifies the fixed consideration, which includes

any nonrefundable upfront payment amounts. In addition to fixed consideration, an entity considers the

following components in determining the transaction price:

• Variable consideration and the constraint

• Significant financing components

• Noncash consideration

• Consideration payable to the counterparty

Each component is discussed in more detail in this section.

Figure 3.1: Components for determining the transaction price

Consideration payable to the counterparty

Variable consideration and the constraint

Noncash consideration

Significant financing components

Transaction price

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At the crossroads: Change in timing and amount of gain recognition for

real estate sales

The timing and amount of gain recognition under ASC 610-20 for a real estate transaction differs from

the legacy guidance on accounting for sales of real estate in ASC 360-20. For starters, the bright line

minimum initial investment thresholds in ASC 360-20 no longer apply. Further, the guidance requiring

the use of the deposit method, the reduced profit method, or the installment method used to determine

the amount and timing of gain recognition has been superseded. All transactions that qualify as a

sale will now qualify for full gain recognition, subject to the constraint for any variable consideration.

Receivables that arise from sales of real estate, however, still need to be assessed for collectibility

under ASC 326 (or under ASC 310, prior to adopting the new credit losses guidance in ASC 326).

The following example illustrates the application of the guidance in ASC 610-20 to a sale of real estate

that would previously not have qualified for full gain recognition under the accrual method based on the

initial investment requirements in ASC 360-20.

Sale of real estate with less than 10 percent initial investment

Entity N is a bank that has obtained a high-rise office building through foreclosure (Building P). Entity N

and Entity O execute a sales agreement in which Entity N sells Building P to Entity O for $100 million,

with Entity N providing financing to Entity O. The parties enter into a $95 million, 15-year, 7 percent

interest term loan, which is secured by the property and is nonrecourse debt. The remaining $5 million is

paid in cash by Entity O at the transaction’s closing.

Entity O is a relatively small real estate holding entity with a portfolio of four additional office buildings,

each of which is pledged as collateral under separate term loans. Building P is fully leased with long-

term leases to various companies. Entity O’s ability to repay the loan is dependent on the operating

cash f lows from Building P. Before entering into the sale, Entity N considers the creditworthiness of

Entity O as well as its historical collection experiences in similar deals with similar buyers. Entity N

concludes that Entity O’s credit risk (after considering the in-place leases on Building P) is acceptable

and determines that it is probable it will collect substantially all of the consideration to which it is entitled.

Entity N therefore determines that a contract exists under ASC 606-10-25-1.

Because there is only one promised asset (the building), Entity N does not need to evaluate the criteria

regarding distinct performance obligations in ASC 606. Entity N is financing the transaction, but the

f inancing is not a promise and therefore is not a performance obligation, but is instead considered part

of the transaction price.

Entity N determines the transaction price equals the $100 million purchase price for the building noted in

the sales agreement. Entity N considers the impact of financing on the arrangement, which, in this case,

contains an explicit financing component. Entity N determines that the 7 percent interest rate explicit in

the arrangement is consistent with the discount rate that would be reflected in a separate financing

transaction between Entity N and its banking customers at contract inception and that the 7 percent rate

ref lects the credit characteristics of Entity O. Entity N also considers the impact of the collateral provided

by the building being transferred from Entity N to Entity O. As a result, there is no further impact to the

transaction price for the explicit financing in the arrangement.

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Entity N determines that control of the building transfers at the transaction’s closing date and therefore

uses the $100 million sales price (the transaction price) to calculate the gain on that date.

3.1.1 Variable consideration

When a contract price includes a variable amount, the entity must estimate the amount of variable

consideration to which it expects to be entitled.

ASC 606-10-32-5

If the consideration promised in a contract includes a variable amount, an entity shall estimate the

amount of consideration to which the entity will be entitled in exchange for transferring the promised

goods or services to a customer.

Variable consideration includes any consideration that is not fixed. In other words, the amount of

consideration may fluctuate as a result of the outcome of uncertain events. The variability may be

explicitly stated in the contract or may be implicit. Variable consideration may be fixed in amount, but the

entity’s right to receive that consideration is contingent on a future outcome. An example of variable

consideration in a sale of nonfinancial or in substance nonfinancial assets is contingent consideration

payable by the counterparty, such as an “earn-out” provision, where the counterparty agrees to pay the

selling entity additional amounts as certain events occur or conditions are met.

ASC 606-10-32-7

The variability relating to the consideration promised by a customer may be explicitly stated in the

contract. In addition to the terms of the contract, the promised consideration is variable if either of the

following circumstances exists:

a. The customer has a valid expectation arising from an entity’s customary business practices,

published policies, or specific statements that the entity will accept an amount of consideration that

is less than the price stated in the contract. That is, it is expected that the entity will offer a p rice

concession. Depending on the jurisdiction, industry, or customer this offer may be referred to as a

discount, rebate, refund, or credit.

b. Other facts and circumstances indicate that the entity’s intention, when entering into the contract

with the customer, is to offer a price concession to the customer.

If a contract includes variable consideration, an entity must determine whether to “constrain” the amount

of estimated variable consideration. The objective of the constraint is for an entity to recognize the

consideration promised in the contract in income only to the extent that it is probable a significant reversal

in the cumulative consideration will not occur when the contingency affecting the total consideration is

resolved. In other words, an entity includes some or all of its estimate of variable consideration in the

transaction price only to the extent that it is probable a significant reversal of the cumulative consideration

will not occur when the uncertainty leading to the variability is resolved.

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The following example shows how variable consideration is considered in the context of the sale of a

nonf inancial asset.

Sale of nonfinancial asset with variable consideration

Entity Q sells land with a carrying value of $8 million to Entity R, a property developer. Because the

property is a nonfinancial asset that is not an output of Entity Q’s ordinary activities and is not a

business, Entity Q concludes that it should derecognize the land in accordance with the guidance in

ASC 610-20.

Entity R agrees to buy the land for a $10 million upfront payment plus 2 percent of Entity R’s final selling

price af ter it develops and sells the property.

Entity Q estimates that the property will sell for $50 million and that it will be entitled to an additional

$1 million. Entity Q considers whether it is probable that a significant reversal in the cumulative

consideration recognized for the contract would occur if it includes the $1 million in the transaction price,

but determines that the transaction price does not need to be constrained. Entity Q calculates a total

transaction price of $11 million and recognizes a gain of $3 million.

Grant Thornton insights: Variable consideration could result in losses upon

derecognition

If a transaction involves a significant amount of variable consideration that is excluded from the

transaction price upon derecognition due to the application of the constraint guidance, it is possible

that a loss would be recognized upon derecognition. In other words, the amount of consideration

subject to the constraint may be so large that the transaction price upon derecognition may be less

than the carrying amount of the nonfinancial asset.

3.1.2 Significant financing components

In determining the transaction price of a sale of a nonfinancial asset consistent with the guidance in

ASC 606, an entity must reflect the time value of money if the agreed-upon timing of payments in the

contract includes a significant financing component, whether explicit o r implicit. The objective in adjusting

the transaction price for the time value of money is to reflect the transaction price as though the

counterparty had paid cash for the asset(s) when the entity transferred the asset(s). Either party may

benef it from financing—that is, the counterparty may pay before the entity transfers the asset (a

counterparty loan to the entity) or the counterparty may pay after the entity performs its obligation (a loan

by the entity to the counterparty).

To determine whether a contract contains a significant financing component, an entity considers all

relevant facts and circumstances, including, but not limited to, the following:

• The dif ference, if any, between the promised consideration and the cash price that would be paid if

the counterparty had remitted payments as the assets were delivered

• The combined effect of the time between delivery of the asset and receipt of payment, as well as the

prevailing market interest rates

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ASC 606-10-32-15

In determining the transaction price, an entity shall adjust the promised amount of consideration for

the ef fects of the time value of money if the timing of payments agreed to by the parties to the contract

(either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing

the transfer of goods or services to the customer. In those circumstances, the contract contains a

significant financing component. A significant financing component may exist regardless of whether

the promise of financing is explicitly stated in the contract or implied by the payment terms agreed to

by the parties to the contract.

ASC 606-10-32-16

The objective when adjusting the promised amount of consideration for a significant financing

component is for an entity to recognize revenue at an amount that reflects the price that a customer

would have paid for the promised goods or services if the customer had paid cash for those goods

or services when (or as) they transfer to the customer (that is, the cash selling price). An entity shall

consider all relevant facts and circumstances in assessing whether a contract contains a f inancing

component and whether that financing component is significant to the contract, including both of the

following:

a. The dif ference, if any, between the amount of promised consideration and the cash selling price of

the promised goods or services

b. The combined effect of both of the following:

1. The expected length of time between when the entity transfers the promised goods or services

to the customer and when the customer pays for those goods or services

2. The prevailing interest rates in the relevant market.

The following example illustrates a common transaction with a significant financing component.

Sale of real estate with significant financing

Entity S is a bank that has obtained a single-family home through foreclosure on a loan. The home has

a carrying value of $300,000. Entity S enters into an agreement to sell the home to an individual buyer

for $500,000 and agrees to provide financing in the form of a 30-year mortgage at a 5 percent interest

rate. Over the course of the 30-year loan, Entity S will collect a total of $966,279.

Entity S considers the impact of financing on the arrangement. In this case, the arrangement contains

an explicit financing component. The individual buyer is an unrelated party and the transaction was

negotiated at arm’s length at a rate consistent with the rate offered to individuals who are not

purchasing their home directly from the bank. Therefore, Entity S determines the full financing portion

of the transaction should be accounted for under ASC 310, and no adjustment should be made to the

transaction price for the sale of the home. As a result, Entity S determines the transaction price to be

the $500,000 purchase price noted in the sales agreement and recognizes a $200,000 gain upon

transferring control of the home to the buyer.

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Grant Thornton insights: Financing on transactions with related parties

The sale of an asset with an explicit financing agreement to an unrelated third party is likely to be

negotiated at arm’s length, with the terms of the financing consistent with market rates. However, there

may be cases when a counterparty is provided with financing at rates below market. This situation

arises most often when an asset is being sold to a related party. Entities should exercise caution when

evaluating the existence of a significant financing component in these situations as they may need to

calculate interest in accordance with ASC 835.

Despite the guidance in ASC 606-10-32-15 and 32-16, a contract does not contain a significant financing

component if any one of the following three conditions exists:

• Advance payments have been made, but the counterparty will decide on the timing of the transfer of

the asset.

• The consideration is mostly variable and is based on factors outside the entity’s or counterparty’s

control.

• The dif ference between the promised consideration and the cash price relates to something other

than f inancing, and the difference is proportional to the reason for the difference, such as protecting

one of the parties from the other party’s nonperformance.

ASC 606-10-32-17

Notwithstanding the assessment in paragraph 606-10-32-16, a contract with a customer would not

have a significant financing component if any of the following factors exist:

a. The customer paid for the goods or services in advance, and the timing of the transfer of those

goods or services is at the discretion of the customer.

b. A substantial amount of the consideration promised by the customer is variable, and the amount

or timing of that consideration varies on the basis of the occurrence or nonoccurrence of a future

event that is not substantially within the control of the customer or the entity (for example, if the

consideration is a sales-based royalty).

c. The dif ference between the promised consideration and the cash selling price of the good or

service (as described in paragraph 606-10-32-16) arises for reasons other than the provision

of finance to either the customer or the entity, and the difference between those amounts is

proportional to the reason for the difference. For example, the payment terms might provide the

entity or the customer with protection from the other party failing to adequately complete some or

all of its obligations under the contract.

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3.1.3 Noncash consideration

Sometimes a counterparty promises to pay for an asset in a form other than cash, such as shares of

common stock or other equity instruments. Payment can also take the form of a noncontrolling interest in

the counterparty, which is particularly common for transactions involving the sale of real estate, and may

result in a partial sale, as discussed in Section 2.5.

ASC 610-20-32-4

If an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial

asset in exchange for a noncontrolling interest, the entity shall consider the noncontrolling interest

received from the counterparty as noncash consideration and shall measure it in accordance with

the guidance in paragraphs 606-10-32-21 through 32-24. Similarly, if a parent transfers control of a

distinct nonfinancial asset or in substance nonfinancial asset by transferring ownership interests in

a consolidated subsidiary but retains a noncontrolling interest in its former subsidiary, the entity

shall consider the noncontrolling interest retained as noncash consideration and shall measure it in

accordance with the guidance in paragraphs 606-10-32-21 through 32-24.

An entity should measure the estimated fair value of the noncash consideration at contract inception

when determining the transaction price.

ASC 606-10-32-21

To determine the transaction price for contracts in which a customer promises consideration in a

form other than cash, an entity shall measure the estimated fair value of the noncash consideration

at contract inception (that is, the date at which the criteria in paragraph 606-10-25-1 are met).

The starting point for estimating fair value is the noncash consideration itself; however, if the entity cannot

reasonably estimate the fair value of the noncash consideration, it should use the stand-alone selling

price of the assets that it is providing to the counterparty in exchange for consideration under the contract.

ASC 606-10-32-22

If an entity cannot reasonably estimate the fair value of the noncash consideration, the entity shall

measure the consideration indirectly by reference to the standalone selling price of the goods or

services promised to the customer (or class of customer) in exchange for the consideration.

3.1.4 Consideration payable to a counterparty

Consideration payable to a counterparty includes amounts that an entity pays or expects to pay to a

counterparty, such as a rebate, and occurs in many forms, including cash, credits, or other items that the

counterparty can apply against amounts owed to the entity. Consideration payable to a counterparty is a

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reduction in the transaction price under ASC 606. The logic behind this guidance is that an entity should

not inf late the transaction price by amounts given to counterparties that it will receive back through the

purchase of its assets.

The key to appropriately accounting for consideration payable to a counterparty is determining whether

the payment is made in exchange for a distinct nonfinancial or in substance nonfinancial asset and, if so,

whether the amount paid is consistent with the market pricing for that distinct asset.

When an entity concludes that the consideration paid to a counterparty is in exchange for a distinct

nonf inancial or in substance nonfinancial asset, it accounts for the distinct asset as it would any other

purchase of a nonfinancial or in substance nonfinancial asset, as long as the consideration paid does not

exceed the fair value of the asset received. When the consideration exceeds the fair value of the distinct

asset received, any excess is accounted for as a reduction in the transaction price.

If , on the other hand, the entity concludes that the consideration paid to the counterparty is not in

exchange for a distinct good or service, the entity would reduce the transaction price by the amount it

pays or owes the counterparty.

3.2 Counterparty assumes or relieves a liability

In addition to the transaction price calculated under the guidance in ASC 606, any liabilities assumed or

relieved also impact the calculation of the gain or loss recognized on the transfer of a nonfinancial or in

substance nonfinancial asset.

ASC 606-10-32-25

Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay,

to the customer (or to other parties that purchase the entity’s goods or services from the customer).

Consideration payable to a customer also includes credit or other items (for example, a coupon or

voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the

entity’s goods or services from the customer). An entity shall account for consideration payable to a

customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the

customer is in exchange for a distinct good or service (as described in paragraphs 606-10-25-18

through 25-22) that the customer transfers to the entity. If the consideration payable to a customer

includes a variable amount, an entity shall estimate the transaction price (including assessing whether

the estimate of variable consideration is constrained) in accordance with paragraphs 606-10-32-5

through 32-13.

ASC 606-10-32-26

If consideration payable to a customer is a payment for a distinct good or service from the customer,

then an entity shall account for the purchase of the good or service in the same way that it accounts

for other purchases from suppliers. If the amount of consideration payable to the customer exceeds

the fair value of the distinct good or service that the entity receives from the customer, then the entity

shall account for such an excess as a reduction of the transaction price. If the entity cannot reasonably

estimate the fair value of the good or service received from the customer, it shall account for all of the

consideration payable to the customer as a reduction of the transaction price.

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ASC 610-20-32-5

If a counterparty promises to assume or relieve a liability of an entity in exchange for a transfer

of nonfinancial assets or in substance nonfinancial assets within the scope of this Subtopic, the

transferring entity shall include the carrying amount of the liability in the consideration used to

calculate the gain or loss. Although a liability assumed or relieved by a counterparty shall be included

in the consideration used to calculate a gain or loss, an entity shall not derecognize the liability until it

has been extinguished in accordance with the guidance in paragraph 405-20-40-1 (see paragraph 610-

20-45-3 on how to present the liability if it is extinguished before or after the entity transfers control

of the nonfinancial assets or in substance nonfinancial assets). If an entity transfers control of the

nonf inancial assets or in substance nonfinancial assets before a liability is extinguished, it shall apply

the guidance on constraining estimates of variable consideration in paragraph 606-10-32-11 to

determine the carrying amount of the liability to be included in the gain or loss calculation.

The following example illustrates the treatment of a liability relieved in a transaction with a counterparty

and its impact on the calculation of the related gain or loss.

Liability relieved upon transfer of an asset

Entity T enters into a contract to sell a building to Entity U for $1 million, which is also its fair value. The

building’s carrying value is $600,000, and Entity T has $300,000 outstanding on its mortgage on the

building. Entity U agrees to purchase the building for $700,000 in cash and will assume responsibility for

the $300,000 remaining on the mortgage. Because Entity T is relieved of its mortgage liability as part of

the transaction, Entity T includes the relief of the liability in calculating the transaction price and records

a $400,000 gain on the sale of the building ($1 million consideration received less $600,000 book

value).

While a liability assumed or relieved by the counterparty is included in the calculation of the gain or

loss upon transfer of a nonfinancial or in substance nonfinancial asset, an entity can only derecognize

the liability when it has been extinguished in accordance with the guidance in ASC 405-20-40-1.

Extinguishing the liability may occur after control over the nonfinancial or in substance nonfinancial asset

is transferred in some cases.

ASC 405-20-40-1

Unless addressed by other guidance (for example, paragraphs 405-20-40-3 through 40-4 or

paragraphs 606-10-55-46 through 55-49), a debtor shall derecognize a liability if and only if it has

been extinguished. A liability has been extinguished if either of the following conditions is met:

a. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor

includes the following:

1. Delivery of cash

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2. Delivery of other financial assets

3. Delivery of goods or services

4. Reacquisition by the debtor of its outstanding debt securities whether the securities are

cancelled or held as so-called treasury bonds.

b. The debtor is legally released from being the primary obligor under the liability, either judicially or

by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively

accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a

third party in conjunction with the sale of an asset that serves as sole collateral for that debt.

3.3 Sales of nonfinancial assets between an investor and equity method

investee Under the guidance in ASC 323 the determination of whether intra-entity profits and losses are eliminated

on sales of nonfinancial and in substance nonfinancial assets between an investor and equity method

investee that are at arm’s length depends on whether such sales are “upstream” or “downstream.”

Intra-entity profits or losses on transfers of nonfinancial and in substance nonfinancial assets from an

investor to an equity method investee (that is, a “downstream” transfer) that are conducted at arm’s length

are not eliminated. Rather, downstream transfers of nonfinancial and in substance nonfinancial assets

within the scope of ASC 610-20 between investors and equity method investees are accounted for as

though they are between unrelated parties, provided that these transactions are conducted at arm’s

length (although the fact that the transaction is with a related party may need to be disclosed).

However, investors should eliminate intra-entity profits or losses recognized by an equity method investee

f rom transfers of nonfinancial and in substance nonfinancial assets made by the equity method investee

to the investor (that is, an “upstream” transfer) that is within the scope of ASC 610-20, to the extent that

the asset remains on the books of the equity method investor at the end of the reporting period. For

productive assets, such as buildings, equipment, furniture, and fixtures, or for intangible assets that are

not sold to third parties, the investor should amortize any deferred profit over the life of the productive

assets.

ASC 323-10-35-7

Intra-entity profits and losses shall be eliminated until realized by the investor or investee as if the

investee were consolidated. Specifically, intra-entity profits or losses on assets still remaining with

an investor or investee shall be eliminated, giving effect to any income taxes on the intra-entity

transactions, except for any of the following:

a. A transaction with an investee (including a joint venture investee) that is accounted for as a

deconsolidation of a subsidiary or a derecognition of a group of assets in accordance with

paragraph 810-10-40-3A through 40-5.

b. A transaction with an investee (including a joint venture investee) that is accounted for as a

change in ownership transaction in accordance with paragraphs 810-10-45-21A through 45-24.

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c. A transaction with an investee (including a joint venture investee) that is accounted for as the

derecognition of an asset in accordance with Subtopic 610-20 on gains and losses from the

derecognition of nonfinancial assets.

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4. Allocating the gain or loss

An entity that transfers multiple nonfinancial and in substance nonfinancial assets under the same

contract may need to allocate the consideration between the distinct nonfinancial assets or distinct in

substance nonfinancial assets. However, if control of all of the assets transfers at the same time, the

entity may not need to allocate the consideration.

ASC 610-20-32-6

An entity shall allocate the consideration calculated in accordance with the guidance in paragraphs

610-20-32-2 through 32-5 to each distinct nonfinancial asset or in substance nonfinancial asset by

applying the guidance in paragraphs 606-10-32-28 through 32-41.

The goal when allocating the transaction price is to allocate an amount that best represents consideration

that the entity expects to receive for transferring each asset to the counterparty. Generally, the best way

to accomplish this goal is to allocate the contract’s transaction price to each of the distinct assets on a

relative stand-alone selling price basis.

There are two exceptions to the general allocation guidance in ASC 606: allocating discounts and

allocating variable consideration. Under these exceptions, an entity should allocate a disproportionate

amount of the transaction price to specific assets based on evidence that suggests the discount or

variable consideration relates to those specific assets.

ASC 606-10-32-28

The objective when allocating the transaction price is for an entity to allocate the transaction price to

each performance obligation (or distinct good or service) in an amount that depicts the amount of

consideration to which the entity expects to be entitled in exchange for transferring the promised goods

or services to the customer.

ASC 606-10-32-29

To meet the allocation objective, an entity shall allocate the transaction price to each performance

obligation identified in the contract on a relative standalone selling price basis in accordance with

paragraphs 606-10-32-31 through 32-35, except as specified in paragraphs 606-10-32-36 through

32-38 (for allocating discounts) and paragraphs 606-10-32-39 through 32-41 (for allocating

consideration that includes variable amounts).

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4.1 Determining stand-alone selling price

An entity should determine the stand-alone selling price of each asset at contract inception. ASC 606

def ines “stand-alone selling price” as the price at which an entity would sell an asset separately to a

counterparty.

In determining the stand-alone selling price, an entity is required to maximize the use of observable

inputs. In other words, the best evidence of the stand-alone selling price, if available, is the observable

price of a nonfinancial asset or an in substance nonfinancial asset sold in a stand-alone transaction to

similar counterparties in similar circumstances.

ASC 606-10-32-31

To allocate the transaction price to each performance obligation on a relative standalone selling price

basis, an entity shall determine the standalone selling price at contract inception of the distinct good or

service underlying each performance obligation in the contract and allocate the transaction price in

proportion to those standalone selling prices.

ASC 606-10-32-32

The standalone selling price is the price at which an entity would sell a promised good or service

separately to a customer. The best evidence of a standalone selling price is the observable price of a

good or service when the entity sells that good or service separately in similar circumstances and to

similar customers. A contractually stated price or a list price for a good or service may be (but shall not

be presumed to be) the standalone selling price of that good or service.

If the stand-alone selling price is not observable, an entity should estimate the stand-alone selling price

using all information that is reasonably available to the entity, maximizing the use of observable inputs.

ASC 606-10-32-33

If a standalone selling price is not directly observable, an entity shall estimate the standalone selling

price at an amount that would result in the allocation of the transaction price meeting the allocation

objective in paragraph 606-10-32-28. When estimating a standalone selling price, an entity shall

consider all information (including market conditions, entity-specific factors, and information about the

customer or class of customer) that is reasonably available to the entity. In doing so, an entity shall

maximize the use of observable inputs and apply estimation methods consistently in similar

circumstances.

In BC 268 of ASU 2014-09, which codifies the guidance in ASC 606 and ASC 610-20, the FASB decided

not to preclude or prescribe any particular method for estimating stand-alone selling price, as long as the

method results in an estimate that provides a faithful representation of the price at which the ent ity would

separately sell the asset. While ASC 606 does not prescribe an estimation method, it does indicate that

the following methods are acceptable for estimating the stand-alone selling price when the selling price is

not directly observable:

• Adjusted market assessment approach

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• Expected cost-plus-a-margin approach

• Residual approach

ASC 606-10-32-34

Suitable methods for estimating the standalone selling price of a good or service include, but are not

limited to, the following:

a. Adjusted market assessment approach—An entity could evaluate the market in which it sells

goods or services and estimate the price that a customer in that market would be willing to pay

for those goods or services. That approach also might include referring to prices from the entity’s

competitors for similar goods or services and adjusting those prices as necessary to reflect the

entity’s costs and margins.

b. Expected cost plus a margin approach—An entity could forecast its expected costs of satisfying

a performance obligation and then add an appropriate margin for that good or service.

c. Residual approach—An entity may estimate the standalone selling price by reference to the

total transaction price less the sum of the observable standalone selling prices of other goods or

services promised in the contract. However, an entity may use a residual approach to estimate, in

accordance with paragraph 606-10-32-33, the standalone selling price of a good or service only if

one of the following criteria is met.

1. The entity sells the same good or service to different customers (at or near the same time) for

a broad range of amounts (that is, the selling price is highly variable because a representative

standalone selling price is not discernible from past transactions or other observable

evidence).

2. The entity has not yet established a price for that good or service, and the good or service has

not previously been sold on a standalone basis (that is, the selling price is uncertain).

Grant Thornton insights: Estimating stand-alone selling price

Assets sold in transactions accounted for under ASC 610-20 may be less likely to have observable

stand-alone prices than assets sold in transactions accounted for under ASC 606. The transactions

under ASC 610-20 tend to be either unique assets, such as real estate, or other tangible assets not

sold in the ordinary course of business. It is therefore less likely that an entity in this situation can

readily identify an observable stand-alone selling price.

We expect that the most common method used for estimating stand-alone prices will be an adjusted

market assessment. However, entities may lack sufficient data or expertise to reliably estimate the fair

market value of each asset sold in a bundled transaction. As a result, for transactions involving multiple

f inancial and in substance nonfinancial assets that are transferred at different points in time, we believe

that entities should consider hiring a valuation specialist or an appraiser to estimate the stand-alone

selling price for the purposes of performing an allocation.

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5. Presentation and disclosure

The guidance in ASC 610-20 does not introduce any new presentation, but it clarifies how the

presentation requirements in other Codification Topics apply to transactions within the scope of

ASC 610-20.

ASC 610-20-45-1

See paragraph 360-10-45-5 for guidance on presentation of a gain or loss recognized on the sale of a

long-lived asset (disposal group).

ASC 610-20-45-2

When either party to a contract has performed, an entity shall apply the guidance in paragraphs

606-10-45-1 through 45-5 to present the relationship between the entity’s performance and the

counterparty’s payment.

ASC 610-20-45-3

If an entity meets the criteria in paragraph 405-20-40-1 to derecognize a liability assumed (or relieved)

by a counterparty before transferring control of a distinct nonfinancial asset, the liability shall be

derecognized but no gain or loss shall be recognized. Instead, the entity shall record a contract liability,

which represents consideration received before transferring control of the asset. If an entity transfers

control of a distinct nonfinancial asset before meeting the criteria to derecognize a liability assumed by

a counterparty, the entity shall recognize a contract asset to the extent the carrying amount of the

liability is included in the calculation of the gain or loss

The following guidance clarifies that any gains or losses recognized that are not a discontinued operation

should be included in income from continuing operations.

ASC 360-10-45-5

A gain or loss recognized (see Subtopic 610-20 on the sale or transfer of a nonfinancial asset) on

the sale of a long-lived asset (disposal group) that is not a discontinued operation shall be included in

income from continuing operations before income taxes in the income statement of a business entity.

If a subtotal such as income from operations is presented, it shall include the amounts of those gains

or losses.

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Grant Thornton insights: Income statement presentation of sales within the scope of

ASC 606 versus ASC 610-20

Although the measurement and recognition of gains and losses within the scope of ASC 610-20 are

nearly identical to those transactions accounted for under ASC 606, the presentation on the income

statement differs under the two Topics. Consideration received from the sale of assets to a customer

under ASC 606 is presented as revenue on a gross basis, with the cost of sales presented separately.

On the other hand, consideration received from sales within the scope of ASC 610-20 is netted against

the carrying value of the asset transferred to the counterparty and presented as a gain or loss in

income from operations, if the entity includes such a subtotal in the financial statements.

At the end of each reporting period, an entity should present a contract liability, a contract asset, or a

receivable in the balance sheet, depending upon the relationship between the entity’s performance and

the counterparty’s payment at that date, to reflect its rights and obligations under a contract with the

counterparty.

Contract Asset

An entity’s right to consideration in exchange for goods or services that the entity has transferred to a

customer when that right is conditioned on something other than the passage of time (for example, the

entity’s future performance).

Contract Liability

An entity’s obligation to transfer goods or services to a customer for which the entity has received

consideration (or the amount is due) from the customer.

The guidance in ASC 606 uses the terms “contract asset” and “contract liability,” but an entity can use

alternative descriptions, provided that it gives sufficient information to enable financial statement users to

distinguish between contract assets and receivables. An entity should present as a receivable any

unconditional rights to consideration.

ASC 606-10-45-1

When either party to a contract has performed, an entity shall present the contract in the statement of

f inancial position as a contract asset or a contract liability, depending on the relationship between the

entity’s performance and the customer’s payment. An entity shall present any unconditional rights to

consideration separately as a receivable.

ASC 606-10-45-5

This guidance uses the terms contract asset and contract liability but does not prohibit an entity from

using alternative descriptions in the statement of financial position for those items. If an entity uses an

alternative description for a contract asset, the entity shall provide sufficient information for a user of

the f inancial statements to distinguish between receivables and contract assets.

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The guidance ASC 610-20 also does not introduce any new disclosure requirements. Rather, the

guidance in ASC 610-20 refers entities to the disclosure requirements in ASC 360.

ASC 610-20-50-1

See paragraphs 360-10-50-3 through 50-3A for guidance on disclosure of a gain or loss recognized

upon the derecognition of a long-lived asset (disposal group).

ASC 360-10-50-3

Long-Lived Assets Classified as Held for Sale or Disposed Of

For any period in which a long-lived asset (disposal group) either has been disposed of or is classified

as held for sale (see paragraph 360-10-45-9), an entity shall disclose all of the following in the notes to

f inancial statements:

a. A description of the facts and circumstances leading to the disposal or the expected disposal.

b. The expected manner and timing of that disposal.

c. The gain or loss recognized in accordance with paragraphs 360-10-35-37 through 35-45 and

360-10-40-5.

d. If not separately presented on the face of the statement where net income is reported (or in the

statement of activities for a not-for-profit entity), the caption in the statement where net income is

reported (or in the statement of activities for a not-for-profit entity) that includes that gain or loss.

e. If not separately presented on the face of the statement of financial position, the carrying

amount(s) of the major classes of assets and liabilities included as part of a disposal group

classified as held for sale. Any loss recognized on the disposal group classified as held for sale

in accordance with paragraphs 360-10-35-37 through 35-45 and 360-10-40-5 shall not be allocated

to the major classes of assets and liabilities of the disposal group.

f. If applicable, the segment in which the long-lived asset (disposal group) is reported under

Topic 280 on segment reporting.

ASC 360-10-50-3A

In addition to the disclosures in paragraph 360-10-50-3, if a long-lived asset (disposal group) includes

an individually significant component of an entity that either has been disposed of or is classified as

held for sale (see paragraph 360-10-45-9) and does not qualify for presentation and disclosure as a

discontinued operation (see Subtopic 205-20 on discontinued operations), a public business entity and

a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed,

or quoted on an exchange or an over-the-counter market shall disclose the information in (a). All other

entities shall disclose the information in (b).

a. For a public business entity and a not-for-profit entity that has issued, or is a conduit bond obligor

for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, both

of the following:

1. The pretax profit or loss (or change in net assets for a not-for-profit entity) of the individually

significant component of an entity for the period in which it is disposed of or is classified as

held for sale and for all prior periods that are presented in the statement where net income is

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reported (or statement of activities for a not-for-profit entity) calculated in accordance with

paragraphs 205-20-45-6 through 45-9

2. If the individually significant component of an entity includes a noncontrolling interest, the

pretax profit or loss (or change in net assets for a not-for-profit entity) attributable to the parent

for the period in which it is disposed of or is classified as held for sale and for all prior periods

that are presented in the statement where net income is reported (or statement of activities for

a not-for-profit entity).

b. For all other entities, both of the following:

1. The pretax profit or loss (or change in net assets for a not-for-profit entity) of the individually

significant component of an entity for the period in which it is disposed of or is classified as

held for sale calculated in accordance with paragraphs 205-20-45-6 through 45-9

2. If the individually significant component of an entity includes a noncontrolling interest, the

pretax profit or loss (or change in net assets for a not-for-profit entity) attributable to the parent

for the period in which it is disposed of or is classified as held for sale.

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Appendix: FASB guidance abbreviations

Abbreviation FASB guidance title

ASC 310 FASB ASC 310, Receivables

ASC 323 FASB ASC 323, Investments – Equity Method and Joint Ventures

ASC 326 FASB ASC 326, Measurement of Credit Losses on Financial Instruments

ASC 350 FASB ASC 350, Intangibles – Goodwill and Other

ASC 360 FASB ASC 360, Property, Plant, and Equipment

ASC 360-20 FASB ASC 360-20, Property, Plant, and Equipment: Real Estate Sales

ASC 606 FASB ASC 606, Revenue from Contracts with Customers

ASC 610-20 FASB ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets

ASC 810 FASB ASC 810, Consolidation

ASC 835 FASB ASC 835, Imputation of Interest

ASC 845 FASB ASC 845, Nonmonetary Transactions

ASC 860 FASB ASC 860, Transfers and Servicing

ASU 2014-09 Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers

ASU 2017-05 Accounting Standards Update No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets)

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Contacts

Graham Dyer

Partner

Accounting Principles Group

T +1 312.602.8107

E Graham.Dyer@us.gt.com

Rahul Gupta

Partner

Accounting Principles Group

T +1 312.602.8084

E Rahul.Gupta@us.gt.com